According to our latest flash estimate, the year-on-year inflation rate could rise above 3% again by the end of the first half of the year, reaching 4% by the end of the year. While the timing is unfortunate in terms of inflation expectations, the shock has come at the ‘best’ time in terms of the year-on-year inflation print. In essence, inflation can now start to rise from a 10-year low. Therefore, if supply disruptions ease and markets calm down in the coming weeks, there is a real chance that inflation will average 3% for the year as a whole.
The extremely low inflation figures for February and the favourable development of service inflation would almost certainly have been accompanied by a central bank interest rate cut in March. However, given the volatility of energy prices and the forint, and the fact that these are currently causing excess inflation, it is difficult to define monetary policy direction clearly at this point.
For now, we cannot completely rule out the possibility of an interest rate cut. However, if market volatility, a weak forint and high energy prices persist, based on previous experience, the National Bank of Hungary is likely to adopt a cautious approach and leave interest rates unchanged. The interest rate decision meeting is due in exactly two weeks on 24 March; a lot could happen in that time.