Inflation seen dropping big in Hungary, but the reasons matter a lot
Did annual inflation fall below 4% in April? That is the key question in tomorrow's data. The consensus of experts' forecasts is around 4%, a sharp drop from 4.7% in March. There are two main reasons for the marked deceleration:
- the margin cap will be fully reflected in the price index in April, with a significant downward impact on food prices,
- while the oil price, which is falling sharply amid the global economic turmoil, will act as a brake on fuel inflation.
The apparently clear picture hides a great deal of uncertainty. This is reflected in the wide range of analyst forecasts, from 3.5 to 4.3%.
If the Central Statistical Office (KSH) has been collecting data as usual, we are likely to see a significant decline in food inflation in April, said Péter Virovácz, an analyst at ING Bank, referring to the effects of the margin cap. He thinks the inflation rate for this product group may have fallen to around 4.5% on an annual basis, down from around 7% in February-March. This makes Virovácz even more optimistic than the government, as official forecasts put food inflation at around 5%.
A cooling effect on inflation may be due to the fact that telecoms and financial operators (under strong government pressure) are refraining from raising the prices of their services as planned this year. All in all, the favourable developments in commodity prices, the direct price interventions and the price restraint imposed on service providers already point to a very different inflation path from the one that seemed to be emerging after the unexpectedly sharp wave of price increases in January-February. This is reflected in the spectacular fall in forecasts for the end of this year:
In the short term, whether inflation will remain in the target range (or around its upper bound) or "bounce back" will largely depend on how long the government's various price-control measures will last, said Orsolya Nyeste, economist at Erste Bank: "There are quite a lot of uncertainties in the short term, but overall we now see that the probability of the government's 4.5% forecast being reached has increased significantly."
While the official debate is whether the margin cap should be lifted at the end of May or in the summer,
the vast majority of analysts interviewed by Portfolio believe that the tight price controls will remain in place until the middle of next year, i.e. after the elections.
In this context, Nyeste points out that inflation in the system is fairly strongly suppressed, which in turn indicates that the average annual rate of inflation may remain stable above 4% and that the indicator may not stabilise within the central bank's target range in 2026.
The downside risks to inflation from the various price control measures announced by the government are compounded by international economic and trade uncertainty, as well as a worse-than-expected domestic economic performance, which could dampen household demand, said Péter Kiss, Investment Director at Amundi.
If we look only at the consensus of forecasts, we see a very flat inflation path around 4%. However, if we take the above into account, we can be almost certain that it is almost impossible to expect such a stable path with so many effects of different strengths, directions and lengths.
Moreover, past experience shows that it is difficult to maintain stable inflation at anything other than "medium-high" levels. So far, this is reflected in few forecasts, with only two analysts' inflation projections for next year being significantly away from 4%.
One of them is Zsolt Becsey, an analyst at UniCredit, who said: "Government signals and public announcements suggest that margin requirements and commitments may continue next year. In addition, import prices will remain positive due to global recession fears and oil market developments.
As a result, our inflation expectations for this year have declined significantly, while those for the second half of next year have worsened.
An important question is whether the central bank will react to the lower inflation trajectory with its interest rate policy. "The weak GDP data and the declining inflation course could increase the MNB's room for manoeuvre in the future, and we could even see lower interest rates in the longer term," said Márta Balog-Béki, an analyst at MBH Bank.
Zsolt Becsey, while not directly contradicting this, looks at the other side of the change in the central bank's room for manoeuvre. From a monetary policy point of view, restrained repricing in response to government intervention does not automatically create an opportunity for monetary easing. According to Becsey, the MNB will have that opportunity if
- global commodity prices do not rise significantly from current levels,
- inflationary trends in developed markets do not intensify,
- risk aversion towards emerging markets does not increase and
- fiscal developments are sustainable.
Bringing down inflation this way does not really impress monetary policymakers, said Péter Virovácz. In fact, it seems that the central bank is looking beyond the decline in inflation due to temporary measures and is keeping an eye on the long-term developments.
With inflation expectations still high, we see no room for the MNB to cut interest rates in the short term. At the same time, the continued stagnation of the Hungarian economy will significantly reduce the - persistent - inflationary pressure on the demand side. If GDP growth expectations continue to trend downwards, there could still be room for easing towards the end of the year.
Cover image (for illustration purposes only): Portfolio
