Headline CPI undershoot strengthens August MNB cut case, but services still matter
Hungarian inflation fell much more sharply than expected in July, with headline CPI dropping from 1.7% to 1.2% YoY against a 1.6% consensus.
Prices also fell 0.1% MoM, compared with expectations for a 0.2% increase. The downside surprise strengthens the case for a third consecutive 25bp MNB cut on August 26th, taking the policy rate to 5.50%. But the details also validate the key risk we highlighted in our preview: headline inflation is increasingly benign, while domestic services pressures remain considerably firmer.
Weakness was concentrated in categories that do much of the work of pulling headline inflation lower.
Food prices fell sharply, while housing and utility costs also declined, helping push inflation below the lower limit of the MNB’s tolerance band. Core prices, however, still rose 0.2% MoM. More importantly, the services picture remains sticky. Restaurant and hotel prices were 6.0% higher than a year earlier, while health and education costs both rose 4.4% and communication prices increased 5.3%.
In other words, today’s headline undershoot is clearly dovish, but it does not show that domestic price pressures have disappeared.
For the MNB, that distinction matters more for September than August. Governor Varga had already signalled room for another cut through the summer, and today’s data makes a 25bp move this month increasingly difficult to argue against. The more important question is whether easing continues after that. The September Inflation Report will therefore remain pivotal. If services inflation starts to follow the headline lower, the case for extending the cutting cycle strengthens substantially. If services remain sticky, policymakers may prefer to slow the pace despite inflation running far below target.
The forint reacted accordingly, weakening as much as 0.3% against the euro, its softest level since late April, as markets moved back towards more dovish rate expectations.
We think that reaction is directionally consistent with our broader view that a narrowing rate differential should gradually weigh on HUF. That said, today’s move has front-loaded part of the depreciation we expected further out. Positive real rates and the MNB’s continued focus on currency stability should still limit the risk of a disorderly sell-off. Still, July’s CPI print shifts the near-term balance of risks towards a weaker forint as expectations for another rate cut become increasingly well anchored.