Why surprisingly low Hungarian inflation could be a game changer
At a Glance
The unexpectedly low inflation rate in Hungary, falling to 1.8% in May from 2.1% in the previous month, has reshaped the outlook for monetary policy by the National Bank of Hungary (NBH). Per the full note , this new data shifts the conversation from the potential for rate cuts to the magnitude of those cuts, with analysts forecasting a possible reduction of either 25bps or 50bps at the upcoming meeting on June 23. This surprising softness signifies not only a rate cut would be likely but also that the broader economic impacts could lead to more aggressive dovish positioning from monetary authorities.
Key Takeaways
- 01Hungary's inflation dropped unexpectedly to 1.8% in May, below the forecast of 2.1%.
- 02This shift in inflation dynamics suggests the NBH could cut rates by up to 50bps at the upcoming meeting.
- 03Analysts are now focused on the extent of rate adjustments rather than the likelihood of cuts themselves.
- 04The current consensus target for EUR/HUF is 1.075, with a range supporting bullish sentiment.
Full Analysis
What the desk is arguing
The recent data release prompts a shift in strategy for the NBH, with the focus now on how aggressively the central bank might cut rates. As noted in the analysis, inflation's unexpected decline amidst an ongoing energy crisis defies traditional economic correlations, prompting a reevaluation of central bank actions. With food prices, particularly in the context of meal costs, demonstrating notable deflation, this paints a unique picture for Hungary's monetary landscape.
Inflation having slipped below expectations may act as a green light for the NBH. The desk notes the key figure here is May's 1.8% inflation rate, which was notably lower than the market consensus of 2.1%. This might lend credence to the argument for a more substantial rate cut than some analysts have anticipated.
Where it sits in our coverage
Currently, our consensus target for EUR/HUF is 1.075, with participating banks projecting varying outlooks: - jpmorgan: 1.10 (Mar26) - bofa: 1.04 (Mar26)
This evolving scenario puts us at the higher end of the forecast spectrum. The desk aligns closely with jpmorgan, reflecting a bullish stance on the Hungarian forint in anticipation of dovish shifts from the NBH.
How other firms see it
Firms aligned with the dovish outlook for the NBH, such as jpmorgan, may further adjust their forecasts depending on subsequent economic data. Contrarily, bofa holds a more cautious stance given their lower target of 1.04 for the same period, indicating a potential divergence in views on the efficacy of monetary adjustments.
Factors influencing this discourse include the EUR/HUF movement as affected by the NBH's decisions and anticipated shifts in regional central bank policies that could create ripple effects in wider FX markets.
Market Implications
Traders should watch for market movements ahead of the June 23 NBH meeting, as the extent of potential rate cuts will significantly affect the EUR/HUF pair. Any shift towards a more aggressive dovish policy could solidify a bullish trend for the Hungarian forint.
From the original
Older quick take Quick take 12:33 Why surprisingly low Hungarian inflation could be a game changer Inflation in Hungary came in unexpectedly low in May, which could alter the scope for action previously anticipated by the National Bank of Hungary. The question has shifted – it's
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