Good news and bad news: inflation and budget data is out for May

HUNGARY - In Brief 09 Jun 2020 by Istvan Racz

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The May CPI-inflation data, released this morning, was definitely good news. It was not primarily the headline rate, which fell to 2.2% yoy from 2.4% in the previous month, as the monthly average increase of prices still reached 0.5%, i.e. not particularly impressive, only allowing for a decreasing yoy rate because of an exceptionally high number recorded in the base period. But core indices exhibited significant improvement: the MNB's adjusted core index fell to 3.5% yoy from last month's 3.8%, based on a similar drop by basic core inflation to 4% yoy from 4.3%. Non-fuel inflation also decreased similarly, to 4.1% yoy from April's 4.4% yoy level.The message seems to be that the pressure on MNB policies has eased materially, vindicating the Bank's recent cautious re-loosening of policy on the short end of the yield curve, as a result of which BUBOR has edged back down to around 0.9%. In addition to the overall cooling of the economy, the forint's successful stabilisation must have played a role: in May, the yoy rate of the rise of the EURHUF exchange rate moderated to an average 7.9%, following 10.9% in April and 9.3% in March. But even so, we would note here that the MNB has no major room for any further loosening on the short end: core inflation by all existing measures is heading down by cca. 0.2-0.3 %-points between May and the end of this year assuming no policy change during this period. And that would take adjusted core inflation down to the 3-3.5%, where the MNB has said would be satisfied with it for the rest of this year. So may be a bit more fine-tuning through the cautious reduction of the sterilisation ratio is possible, but nothing substantially more in t...