Hungary's inflation creeping higher

Inflation continues to creep higher in Hungary, rising slightly to 0.6% y/y in June from 0.5% in May. Normalization of food and energy price inflation is occurring. Hungary began cutting energy prices in 2013 for political reasons, prior to global declines in energy prices, and continued through Q4 14. As these cuts fall out of the base, energy deflation will cease to be a factor pulling headline inflation lower. This has already happened with food inflation rising to 1.1% y/y in June, nearly equal to core inflation.

Even though inflation is pushing higher, it is still well below the NBH target of 3% +/-1%, says Barclays. The NBH has cut its policy rate by 60bp this year to 1.5% and signaled that further cuts are in the pipeline. 

According to Barclays, "We expect one more 10bp cut to 1.4%, although recognize that further cuts are possible."

Besides the increase in CPI inflation, several other factors seem to support stopping the rate cut cycle. Growth remains buoyant. The HUF has sold off recently due to the risk off environment in Europe, this helps loosen monetary policy conditions and could push inflation higher.