Hungary’s consumer price index was way above the central bank’s mid-term target in September, reaching 3.6%, which represents a five-year high in the data. The inflation increased from 3.4% in August, and it has now remained within the target band since June 2017, except for February 2018 when it slipped slightly below the target.

On a month-on-month comparison, consumer prices rose 0.3% over the previous month in September, up from August’s 0.1% month-on-month increase. September’s increase was largely driven by higher prices for food; alcoholic beverages and tobacco; and clothing and footwear, owing to seasonal factors. Core consumer prices, which exclude volatile items such as fresh food and fuel, grew 0.2% from the previous month in September, up from August’s flat reading.

The National Bank of Hungary (MNB) commented on the data saying that its measures of underlying inflation developments remained broadly static, compared with August. The indicator for core inflation, excluding the effects of indirect taxes, stood at 2.4% in September, edging up from 2.3% in the previous month.

The central bank attributed the pickup in headline inflation to the “rise in volatile unprocessed food prices”, and said core inflation rose as a result of the increase in excise tax on tobacco products. Households’ inflation expectations “remained at moderate levels” in September, the MNB added.

Index Surprise

The index surprised analysts, as most of them had expected a slightly lower year-on-year increase in consumer prices in September.

Business news site FocusEconomics panelists see inflation averaging 2.4% in 2018, which is down 0.1 percentage points from last month’s projection. For 2019, the panel expects inflation to rise to 2.7%, which is unchanged from last month’s projection.

TD Securities’ research team expected the index at 3.5%, FXStreet.com noted. “As expected, food inflation was the main driver of the move higher, up to 4.65% y.o.y. from 4.1%,” the site quotes the research team. “That the inflation rate is continuing to move above the 3% target rate will be of some concern to the MNB, although it can take some comfort from the fact that core inflation has been somewhat better behaved moving up to 2.4% y.o.y. from 2.3%.”

The research team think that the latest data will bring forward the time at which the central bank will have to start unwinding its current loose monetary policy. “The MNB has started flagging that this policy will eventually end and we expect maybe the language to be ramped up a bit in this respect… while leaving current loose monetary conditions unchanged,” they noted.

According to Orsolya Nyeste, senior macro economist analyst at Erste Bank, inflation will remain at this higher level in October but will slow down to near 3% in November and December, due to base effects. As for the whole year, she thinks it is unlikely that the index will drop below 3%.

Slow Increase

“In the coming months, we expect a slow increase in the core inflation index, due to the weaker forint, rising salaries and growing domestic demand. As this year’s average yearly inflation is likely to be higher than previously thought – mainly because of higher oil prices –, we cannot expect a significant acceleration in the CPI; the base rate can rather have a supporting effect. Yearly average inflation can be 3.3% in 2019, following a 2.9% index this year,” Nyeste concluded.

Takarékbank analyst Gergely Suppan thinks that the MNB will not engage in a tightening cycle until mid-2019, and when it does switch to a more hawkish mode, it will fist withdraw its non-conventional tools. Following this, a slow, graduate rise in the CPI can be expected, Suppan said.

Maintaining the loose monetary conditions in Hungary is not supported by the global sentiment, as the Fed is likely to continue to raise its base rate gradually. Also, the European Central Bank is likely to go on with its bond-buying program; however, an actual rate hike is not expected until the second half of 2019, Suppan noted.

As analysts expected, the latest inflation data did not cause a change in the MNB’s monetary policy for now: at its latest rate setting meeting on October 16, the Monetary Council left the base rate unchanged at 0.9%.

The rationale, released by the MNB following the decision, contains no surprises. “In order to maintain the loose monetary conditions, the Monetary Council held the base rate, the overnight collateralized lending rate and the one-week collateralized lending rate at 0.9% and the overnight deposit rate at -0.15%. In addition, in September the council left the average amount of liquidity to be crowded-out for the fourth quarter of 2018 unchanged, at least at HUF 400 billion-600 billion. On the next occasion, in December 2018, the council will decide on the amount of liquidity to be crowded out and will take this into account in setting the stock of central bank swap instruments,” the note reads.

In the meantime, the MNB has increased Hungary’s gold reserves. According to its rationale: “Taking into account the country’s long-term national and economic policy strategy objectives, the National Bank of Hungary’s Monetary Council increased Hungary’s official gold reserves significantly, in line with its previous decision. Accordingly, the amount of gold reserves expanded from the earlier 3.1 tons to 31.5 tons in October 2018. The MNB purchased gold for the first time since 1986.”

Numbers to Watch in the Coming Weeks

The Central Statistical Office will publish earnings data for the January-August period on October 19. The second estimate of retail trade figures will be published on October 24, and employment and unemployment statistics for the July-September period will come out at the end of the month.