Hungarian inflation fell to 2.2% y/y in April, statistics office KSH reported in a first release of data on May 10.
The pace of price rises was slightly below market expectations. Forecasts ranged between 2.3-2.4% after a 2.7% hike in March and a 2.9% rise in February. The reading is in line with regional trends, which have shown the CPI surge around the turn of the year fading as the effect of erratic commodities prices wears off.
That said, core CPI rose 0.3pp on a monthly basis to 1.9% y/y in April. That rising trend is being driven by domestic demand, which is driven by robust wage growth, loose fiscal policy and a rebound in state-led investment.
Average inflation across 2017 is now forecast at 2.4% this year by Takarekbank. The economists suggest the CPI index will not reach the Magyar Nemzeti Bank's target of 3% until the second quarter of 2018.
The pullback in April inflation suggests tightening of monetary conditions is unlikely any time soon. The MNB will stick to current 0.9% base rate until the end of 2018, the majority of economists agree.
In April, the highest annual price rise was registered for motor fuels, reflecting the recent stabilisation of oil prices and the effect of a very low base from 2016. Food prices also contributed strongly to the headline figure.
The volatility in the CPI index will continue to be driven by swings in fuel prices, analysts expect. Annual inflation is likely to remain around the 2% level in the coming months, but could accelerate back to as high as 2.7% in the summer, they add.
The pullback hints that the CPI is likely to remain below the central bank's 2.5% estimate for 2Q17. That would support the MNB's current policy course to stick to the current benchmark and continue its use of unconventional tools to loosen monetary policy and promote soveriegn debt.
The Monetary Council is expected to cut the three-month deposit facility further to HUF500bn in June, a policy that hikes liquidity in the local banking sector, with the aim of directing lenders to offer credit to the real economy or buy government bonds. A reduction to HUF250bn by the end of September is now possible, suggest analysts at Erste.