Hungary’s May CPI held at 1.8% year-on-year, undershooting a 2.2% market expectation and the National Bank of Hungary’s 3% projection in its March inflation report. The data point keeps attention on a domestic disinflation backdrop since the April elections, where sharp foreign-exchange appreciation and price shields have restrained inflation despite a more inflationary global setting.
Markets are increasingly treating a June NBH easing cycle as fully priced, with a 25 basis point cut expected to take the policy rate to 6.00% and 75 bp of easing seen for the full year. In FX, EUR/HUF has traded around 355, holding steady even as global sentiment has deteriorated, and a mid-year level of 350 remains in view as rate-cut expectations firm. The June meeting is two weeks away, while external conditions could still shift, including the weekend’s escalation in the Middle East and a firmer US dollar.
Disinflation Dynamics and Monetary Policy Outlook
We see Hungary’s unique disinflation story continuing, with May’s inflation figure coming in at 2.8% year-on-year, just below the National Bank of Hungary’s (NBH) 3% target. This soft reading solidifies our view that the central bank will proceed with its easing cycle. The market has been anticipating this, which helps explain the forint’s recent resilience.
The upcoming NBH meeting in two weeks is almost certain to deliver a 25 basis point rate cut, bringing the main policy rate to 5.25%. Given the subdued inflation, we believe the market is correctly pricing in an additional 50 to 75 basis points of cuts before the end of the year. Recent communication from the central bank suggests a cautious approach, ruling out any aggressive 50 basis point moves for now.
Currency Stability and Trading Implications
Despite the prospect of lower interest rates, the EUR/HUF has shown remarkable stability, holding near the 392 level. This is largely because the NBH’s measured easing path has been well-telegraphed and is already factored into the price. This pattern is reminiscent of the 2023-2024 period, when the NBH cut rates by over 500 basis points while the forint remained in a relatively stable range.
This environment of priced-in rate cuts and low currency volatility suggests a favorable setup for options traders. We believe selling out-of-the-money EUR/HUF call options is an attractive strategy to capitalize on the stable-to-strengthening forint outlook. This approach allows traders to collect premium as the pair is unlikely to break significantly higher, with our mid-year forecast still targeting a move towards 388.
