Hungary inflation will remain well below the 3% target, giving space for NBH to cut further

The National Bank of Hungary (NBH) cut its base rate by 15bp to 1.95%. After eight months being on hold, the NBH has re-initiated a cutting cycle. 

Since then, CPI entered an extended period of deflation. The main factors causing deflation are lower energy prices, lower food prices and base effects from the tax increase in 2013 falling out of the base. 

Last month, headline inflation increased slightly to -1.0% y/y due to HUF appreciation and base effects from electricity price increases in 2014

Barclays Capital notes as follows ....

• We expect inflation to remain below zero for an extended period and then increase in Q4 15 due to base effects from Q4 14, when CPI prices fell by -2.0pp. However, inflation will still remain well below the 3% target. 
  
  
• Therefore, this creates space for the NBH to cut further, in our view. Previously, we thought it would cut 20bp in each month during March, April and May. With the 15bp cut today, we see some downside risk to our forecast, the cumulative NBH cuts could be less.