Hungary’s CPI inflation slowed to 1.8% y/y in May from 2.1% y/y in April, undershooting the 2.2% y/y consensus forecast and slipping just below the lower bound of the National Bank of Hungary’s (MNB) tolerance range. The downside surprise was partly attributed to supply factors such as administrative fuel price caps and earlier government measures, while recent rises in global energy and commodity prices linked to the Iran war were described as having limited pro-inflationary effect. Underlying inflation measures were said to remain within target.
The MNB governor said the Monetary Policy Council (MPC) discussed cutting rates on 26 May, but kept the benchmark unchanged in a non-unanimous decision, citing a more benign inflation path and changes in the country’s risk premium. With the key policy rate at 6.25% and inflation around 2% y/y, the implied real rate remains high. Attention now turns to the 23 June meeting, where a cut is framed as more likely, while EUR/HUF is expected to trade in a 355–360 range over the coming quarter.
Path Clear For Policy Easing
With May inflation confirmed by the Hungarian Central Statistical Office at a low 1.8%, well below the central bank’s tolerance band, the path is clear for policy easing. This figure, combined with core inflation also easing to 2.8%, gives the National Bank of Hungary (MNB) a strong justification to act. We anticipate a rate cut at the upcoming policy meeting on June 23rd.
The current 6.25% policy rate creates a significant real interest rate that has been supporting the forint. Forward rate agreements are now pricing in an over 90% probability of a 25 basis point cut, showing the market already anticipates this move. Even after such a cut, the policy rate would remain substantially higher than the European Central Bank’s benchmark rate of 3.25%, maintaining the forint’s carry trade appeal.
Currency And Options Market Implications
We believe a rate cut is already priced into the currency, preventing a significant sell-off and keeping the EUR/HUF exchange rate within a stable 355-360 range. This environment is attractive for option sellers, as 3-month implied volatility on EUR/HUF options has fallen from over 10% to a recent low of 7.5%. Therefore, selling strangles with strikes set outside of this expected range could be a viable strategy in the coming weeks.
