Hungary's Inflation Rate Rises to 4% in May, Central Bank Rate-Cut Cycle in Question

Key Takeaway

• Hungary's inflation rate rose to 4% in May, signaling a potential end to the central bank's rate-cut cycle.
• The central bank is expected to reduce rates to 6.75-7% in June, down from the current 7.25%.
• Despite gains against the euro, the forint is down 2.1% for the year, influencing inflation control strategies.

Inflation Rate Increase

Hungary's annual inflation rate rose to 4% in May, up from 3.7% in April, according to the Budapest-based statistics office. This increase marks the second consecutive month of rising inflation, signaling a potential end to the central bank's rate-cut cycle that began last May. The inflation rate exceeded the median expectation of 4.2% from economists polled by Bloomberg, with estimates ranging between 3.7% and 4.6%. On a month-to-month basis, prices fell by 0.1%.

The central bank's rate cuts, which started from an effective rate of 18%, are expected to be reduced to 6.75-7% at the June meeting, down from the current 7.25%. Deputy Governor Barnabas Virag indicated that there is "very, very limited room" for further easing after June. The central bank aims to maintain a gap between its interest rate and the inflation level to protect the country's currency, the forint.

Currency and Fuel Prices

The forint showed gains against the euro for most of May, which, along with a 4.4% month-on-month drop in fuel prices, likely helped to restrain inflation. Despite these gains, the forint is still down 2.1% for the year. The central bank's strategy to maintain a distance between interest rates and inflation is partly aimed at stabilizing the forint.

Global Rate Cut Trends

Globally, central banks are navigating the complexities of unwinding their interest-rate policies. Policymakers from South Korea to Canada are assessing their progress in slowing inflation, with some already initiating rate cuts. In Latin America, rate cuts have been ongoing since earlier this year. However, price pressures remain stubborn, and a strong dollar has impacted developing nations, adding uncertainty to the post-pandemic economic recovery.

In the United States, Federal Reserve officials are expected to hold interest rates steady in their upcoming meeting, as the economy continues to perform well and the labor market remains strong. However, recent Labor Department data suggests that last year's payroll gains may not have been as robust as initially reported, raising concerns that the Fed might maintain tight monetary policy for too long.

Street Views

• Barnabas Virag, Deputy Governor of the Hungarian Central Bank (Neutral on Hungary's monetary policy):

  "Very, very limited room for further easing after June."