Hungary’s CPI surprised as it slumped back into negative territory in May, statistics office KSH reported on June 8.
Hungary slumped back into deflation for the first time in six months in March. However, a swift rebound followed in April to boost analyst expectations that prices would remain in positive territory in May. Although CPI increased 0.3% on a monthly basis, a 0.2% y/y decrease points to a continuing disinflationary environment.
While the Magyar Nemzeti Bank (MNB) is unlikely to move immediately given other pressures, the return of deflation will push it again towards unconventional tools to loosen monetary policy. The surprise in May will also open up discussion of further cuts to the benchmark in the longer term. Rate setters delivered a three-month monetary easing cycle, to leave the benchmark rate at 0.9% on May 26.
"Despite the surprise drop in inflation back to negative territory, the most likely scenario is that the MNB [will] keep the base rate unchanged in June, especially [considering] that the rate setting meeting will be held ... just two days before the Brexit referendum," analysts at KBC suggest in a note.
The decrease in CPI in May was mainly driven by falling fuel prices, which decreased 11.9% y/y. Food prices remained practically unchanged. Alcoholic beverages and tobacco became 2.2% more expensive, services 1.3%, consumer durables 0.8% and clothing and footwear 0.3%.
Global oil prices remain the overwhelming driver of low inflation, and are likely to continue to threaten to push Hungary's CPI again 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.
CPI "may remain around the zero level till August and we may see the first substantial jump in Hungary in September to around 1% Y/Y level (...). The driver of the autumn increase of CPI beside the base effect is the excise duty hike of tobacco and fuel," KBC notes.