Macro July 09, 2019 / 08:02 am UTC

Hungary Flows: Forint Weakens Slightly on Soft June Inflation Data

By Francesca Beausang

The Hungarian forint weakened slightly on Tuesday to EUR/HUF 325.27 on the back of a larger-than-expected moderation in Hungary's June inflation to 3.4% y/y from 3.9% y/y versus a 3.6% y/y market expectation. Hungary's Magyar National Bank (MNB) added that its tax-adjusted inflation gauge also slowed, to 3.5% y/y. However, we believe this deceleration in inflation is merely temporary, and we still expect headline inflation to surpass 4.0% y/y by the end of 2019 and stay above the MNB's target for most of H1 2020 as the economy continues to grow above potential. Therefore, we still expect the Bank to raise its policy rate by 35 bps in 2019 and by a further 25 bps in 2020. Weakness in the forint is also associated with reduced expectations for a hefty interest rate cut by the Fed at the July 30-31 meeting after the strong non-farm payroll print in the U.S. last Friday. That said, while the headline non-farm payroll number was strong, wages were tepid, which could still justify a 25-bp cut as a pre-emptive move. The money market is still fully pricing in a 25-bp cut by the Fed but has almost completely priced out a larger 50-bp cut.

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