Hungary’s Inflation Slowdown Below 10% Boosts Rate Cut Bets

2023-11-10 18:47

Hungary’s inflation rate, the highest in the European Union, dipped below 10% for the first time in 18

Hungary’s inflation rate, the highest in the European Union, dipped below 10% for the first time in 18 months, giving the central bank more room to push on with steeper interest rate cuts.

Consumer prices rose 9.9% from a year earlier in October after a 12.2% increase in September, the statistics office in Budapest said on Friday. That was below the lowest estimate in a Bloomberg survey of economists.

The central bank slowed the pace of borrowing cost reductions last month by a quarter-percentage point after five consecutive one-percentage point cuts, as part of a strategy to start providing positive real interest rates for investors to protect the forint.

The key rate, at 12.25%, is by far the highest in the EU, but analysts now see room for more cuts after the latest indicators.

“The odds for a 100 basis point rate cut are up significantly after today’s data point,” said Peter Virovacz, an economist at ING Bank Hungary. Money market traders have increased bets on further rate cuts by about 10 basis points per month, according to forward rate agreements.

The forint gained 0.6% against the euro on Friday, reaching the strongest in more than three months. The central bank will still need to watch global sentiment going forward, said Piotr Matys, senior analyst at InTouch Capital Markets Ltd. A potential increase in risk aversion may convince policy makers to refrain from large cuts, Matys said.

With Hungary’s economy mired in a year-long recession, Prime Minister Viktor Orban’s government is pressuring policymakers to do more to help kick-start expansion. The central bank should consider increasing its 3% inflation goal to allow for more rapid monetary policy easing, Economic Development Minister Marton Nagy said on Thursday.

Next year’s main theme in economic policy will be reviving growth, Orban said on radio Friday. The central bank has argued it needs to move cautiously to avoid a re-run of last year’s turmoil, when a brush with a currency crisis forced an emergency rate hike.

(Updates throughout with analysts, chart.)