Hungary’s CPI surprised as it swung back to positive territory in April following a slump into deflation in March, statistics office KSH reported on May 10.

The 0.2% y/y rise in the index was well above market expectations that prices would sink another -0.15%, according to a poll by Portfolio.hu. On a monthly basis, consumer prices rose 0.8%, the fastest price increase in over three years. The swift rebound in CPI is likely to reopen debate over the length and depth of the current easing cycle.

Pushed by the fall back into deflation in March, as well as persistent appreciation of the forint, the Magyar Nemzeti Bank (MNB) moved to lower the benchmark by 15 bp to 1.05% on April 26, the second such cut in a row. However, rate setters have sought to cool "exaggerated" rate cut expectations since. Another cut on May 26 is pencilled in, but the better-than-expected CPI reading could trim the size.

The price acceleration in April was driven by fuel and food prices, which gained 4.3% m/m and 0.8%, respectively. On an annual basis, motor fuel prices fell 10.8%, but food prices rose 0.9% y/y. 

Global oil prices remain the overwhelming driver of low inflation, and are likely to continue to threaten to push Hungary's CPI back into negative territory in the coming months, analysts warn. Average inflation is likely finish 2016 at 0.2-0.5%, according to both the market and the MNB.

While a little further monetary easing remains likely, especially in light of tax reductions in 2017, analysts at Raiffeisen Bank forecast that monetary policy is set to "pass the baton” of providing stimulus to fiscal policy.

Citibank analysts expect the MNB “may halt cuts in June or July at 0.90% or 0.75%,” while “changes in monetary instruments may still contribute to monetary easing, such as limiting access to the 3-month benchmark deposit facility”.