Hungary inflation slows less than expected, rate cuts off the cards

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Hungary’s headline inflation eased for a second straight month in March but stubbornly held above 25% and near more than two-decade highs, signaling elevated interest rates may stay longer to help push price growth down.

The Hungarian central bank has the European Union’s highest base interest rate, at 13%, to go along with one of the strongest inflation rates, which has sapped consumer demand and tipped the economy into technical recession.

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But like others in central Europe, the bank is counting on an inflation slowdown this year and has opted against lifting interest rates even as bigger peers like the European Central Bank tighten. At the same time, it is resisting market expectations of rate cuts coming soon.

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With inflation the hottest since the late 1990s, the decline in March was less than expected as the year-on-year inflation rate edged down to 25.2%, missing expectations for a drop to 24.7%.

Core inflation edged up to 25.7%, according to the statistics office, also defying expectations.

“The core inflation reading shows there are serious structural problems with Hungarian inflation,” said Peter Virovacz, an analyst at ING in Budapest.

He said the rise in processed food prices and the 13% annual increase in service prices gave reason for concerns.

“If someone had any bold thoughts about rate cuts any time soon, we can forget that now,” he added.

Central bank Deputy Governor Barnabas Virag said at the end of March that inflation would ease slowly in the coming months before declining substantially in the second half of the year.

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The bank forecasts average inflation to fall to within a range of 15.0-19.5% in 2023 before dropping to 3.0-5.0% in 2024.

Markets have been betting on rate cuts this year while the government of Prime Minister Viktor Orban has urged policy loosening to free up the economy.

Virag has said the base should be maintained for a prolonged period.

Central European economies are all facing double-digit inflation, stronger than in the euro zone, with high food prices a large culprit lately.

Preliminary March data from Poland earlier showed headline inflation staying above 16%, while Czech inflation was expected to slow to 14.9% in March, from 16.7% a month earlier, according to a Reuters poll ahead of a Thursday release.

(Reporting by Jason Hovet in Prague and Krisztina Than in Budapest; Editing by Raissa Kasolowsky)