Hungary Inflation Turning Negative Widens Rate-Cut Scope

Hungary unexpectedly posted a negative inflation rate in April for the first time since 1968, widening the central bank’s room to continue Europe’s longest uninterrupted cycle of interest-rate cuts.

Consumer prices fell 0.1 percent from a year earlier, the statistics office in Budapest said today. The median estimate in a Bloomberg survey of 16 economists projected inflation at 0.1 percent. Prices rose 0.1 percent from March.

The central bank extended its easing cycle in April by lowering the benchmark to a record 2.5 percent from 2.6 percent, the 21st straight monthly reduction. Policy makers targeting medium-term inflation of 3 percent have maintained a looser stance after state-mandated cuts in household utility prices.

“The inflation data were somewhat of a surprise and this may prompt the central bank to consider continuing rate cuts,” said Gyula Pleschinger, a non-executive rate-setter who voted against reductions in February and March on risks to the forint.

The currency gained 0.1 percent to 303.37 per euro as of 3:23 p.m. in Budapest, paring this year’s drop to 2 percent, the fifth-worst performance among 24 emerging-market currencies tracked by Bloomberg. The yield on three-year government debt fell 10 basis points to 3.85 percent, the lowest since January.

Fed, Ukraine

By year-end, the central bank may reduce the benchmark to 2.2 percent in a base case, and to as low as 2 percent if the market environment remains “supportive,” Nora Szentivanyi, a London-based economist at JPMorgan Chase & Co., said by e-mail.

The bank is crafting policy aimed at striking a balance between domestic factors justifying monetary easing and external risks such as the U.S. Federal Reserve’s continued tapering of its stimulus and the escalating conflict over Ukraine.

Policy makers last month left the door open to further interest-rate cuts, saying they’d consider “carefully the macroeconomic outlook and developments in perceptions of the risks associated with the economy before deciding on the direction and magnitude of the next change in the policy rate.”

“Everything is there for the central bank to continue cutting rates further,” Zsolt Kondrat, an economist at Bayerische Landesbank’s MKB Bank in Budapest, said by phone, citing inflation and a stronger forint than in previous months.

Energy Prices

Household energy costs plunged 10.3 percent from a year ago in April and 0.3 percent from March. The latest gas-price cuts were only partially reflected in April’s data, with the bulk to feed through in May’s figures, statistician Borbala Minary told reporters today. Food prices, which fell 0.5 percent from last April, also contributed to the negative inflation rate.

The data continue to point to a “subdued inflationary environment,” the central bank said in a monthly assessment published on its website. Core inflation excluding indirect-tax effects slowed to 1.2 percent from 1.5 percent in March.

“Inflation is already printing meaningfully below the central bank’s inflation forecasts,” Abbas Ameli-Renani, an emerging-markets strategist at Royal Bank of Scotland Group Plc in London, said by e-mail. “The central bank has not finished its easing cycle yet.”

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