Hungarian central bank surprises with upward revision to inflation forecast

Hungarian central bank (MNB) left its main interest rate unchanged at a record low 0.9 percent on Tuesday, as expected. However, the central bank unexpectedly raised inflation projections. In its Q2 Inflation Report which will be published later this week, MNB has announced that it will raise its 2016 forecast from 0.3% to 0.5% and 2017 from 2.4% to 2.6%.

This is the first upward inflation forecast revision in a long time. The scale of the revision is marginal and is probably the combined result of a slightly higher oil price and steady unemployment decline in Hungary. According to its fresh economic projections the bank also said it expected a slightly higher inflation path than before, although still expects inflation to approach its target level of 3 percent only in the first half of 2018.

The MNB is definitely not building a case for any further rate cuts, repeating that it saw low interest rates for a sustained period. The central bank ended three months of rate cuts in May, noting that the benchmark rate adequate to support the economy and meet its medium-term inflation goal.

"In our view, H2 2016 could indeed see some inflation acceleration from the imported commodity side. Still, we think that the 2017 forecast will eventually prove too high and that the door will reopen for rate cuts when this becomes clear, especially if the ECB has also returned to easing by then. We see EUR-HUF at 320.00 levels by the end of 2016," said Commerzbank in a report.