Hungary’s headline inflation accelerated to 3.7% in March from 3.1% in the previous month, the second-highest reading in six-years, according to figures from the Central Statistics Office (KSH) on April 9. In a month-on-month comparison, prices were up 0.7% in March, lifted by rising fuel and tobacco prices. 

Core inflation, which excludes volatile food and fuel prices, picked up from 3.5% in February to a six-year high of 3.8% last month. 

The figure is very close to the +/- 1pp tolerance band around the 3% mid-term target of the Magyar Nemzeti Bank (MNB).

In a separate report, the MNB acknowledged that its measure of core inflation excluding indirect tax effects, a bellwether indicator of underlying inflation, rose 0.3pp point to 3.5% in March.

The reading showcases rising inflationary pressure in the economy, which may force the central bank to switch its position on monetary tightening if the trend continues, analysts said.

The MNB has been resistant to embark on the road of policy normalisation for long, but as its key gauge, the tax-filtered core inflation exceeded 3% in January and 3.2% in February, it came under pressure to act.

At the last policy meeting on March 26, the Monetary Council raised the O/N deposits rates by 10bp and announced to cut the stock of its Fx swaps by HUF200bn to HUF1.87 trillion (€5.8bn) by the end of March to tighten liquidity in forint markets.

MNB governor Gyorgy Matolcsy said the decision did not mark the start of a new monetary easing cycle. This was confirmed in a recent interview by deputy governor Marton Nagy, who said the price stability can be achieved and maintained this year and it is wrong to believe policy normalisation means returning to the interest rate environment of the past.

On the one hand, the MNB has to weigh the impacts of two confronting forces impacting consumer prices. The economic slowdown in the Eurozone has a disinflationary impact, while dynamic growth in wages and internal demand pose an upside risk to the baseline scenario. The MNB said it will switch to a data-driven mode drawing on information from the quarterly inflation reports.

The National Bank said in a quarterly inflation report that CPI would continue to rise in March before dropping under the 3% mid-term target again in the summer.

The MNB raised its forecast for core inflation for 2019 to 3.8% from 3.5% in the previous report published in December. It also bumped up the forecast for core inflation excluding indirect tax effects, a bellwether indicator of underlying inflation, to 3.4% from 3.2%.