Hungary slumped back into deflation in March as consumer prices dropped 0.2%, statistics office KSH reported on April 8.
While a return to deflation has been looking likely in recent months, the drop into negative territory this early in the year came as something of a surprise. The Magyar Nemzeti Bank (MNB) delivered a surprise rate cut to benchmark interest rates on March 22, and said it would likely offer further easing this month. The return to deflation is likely to push rate setters into more extreme action than many have been anticipating.
Unsurprisingly, oil was responsible for most of the damage in March. Although motor fuel prices rose 1.2% m/m, on an annual basis they fell 14.8%. Food prices rose by 0.7% y/y, but pork prices were cut by 19.3%, reflecting the reduction of VAT on the meat at the start of the year. The price of alcoholic beverages and tobacco rose by 2.4% y/y. On a monthly basis, consumer prices rose 0.1%.
Analysts forecast that without a sudden increase of oil prices, inflation is likely to remain in negative territory through the summer. Average inflation is seen likely to come in around 0.2-0.5% in 2016, by both the market and the MNB. In its latest inflation report, the central bank dropped its prediction for 2016 to 0.3% from the previous outlook of 1.7%.
Analysts suggests that the return to deflation confirms the central bank's view about the necessity of the rate cuts, and will push MNB to further monetary easing. The likes of KBC and Capital Economics now say they expect the benchmark to drop as low as 0.75% by the middle of the summer.