EUR/HUF to move higher on low inflation, likely slowdown of Hungarian economy in 2016

Last year, Hungary’s economy expanded strongly by 3%; however, the pace of growth is likely to slow down in 2016. This is because there is threat to the German economy from developments in China, inflow of EU fund will be halted in 2016 and start again in 2017, and the Hungarian auto industry boom is diminishing.

“We forecast slower 2.2% GDP growth during 2016”, said Commerzbank in a research report.

Headline inflation of Hungary is likely to rise higher than 1% by late 2016 from the current near zero because of the base effect from utility price cuts. However, the outlook of inflation is quite benign as compared to recent years. The MNB recently revised down its outlook for 2016 headline inflation to 0.3% from 1.7%, and for core inflation to 1.7% from 2.4%. Meanwhile, downside risk continues to be present for the central bank’s forecasts for 2017. MNB projects core inflation to rise to 2.4% next year; however, it is uncertain if inflation will accelerate by this much, added Commerzbank.

Meanwhile, the MNB lowered its key rate to 0.9% in 2016 and hinted that the rate-cutting cycle is over for now. The central bank is unlikely to further lower rates this year; however, it is expected to cut rates again by the end of next year on the expectations that inflation might decelerate again after rising for a short period of time, noted Commerzbank.

In the coming quarters, the Hungarian forint is expected to be more stable due to the end of rate-cutting cycle. However, there is a possibility that persistent low inflation might renew rate cut projections in the coming year. This, along with projected slowdown of the economic growth in 2016 is likely to exert upward pressure on EUR/HUF by the end of 2016. Also, if the US Fed hikes rates in June or July and in December, the EUR/HUF might see an upward pressure.