Hungary's Inflation Nears Tolerance Band Amid Policy Crossroads

Hungary’s inflation rate inched closer to the upper boundary of the central bank’s tolerance band in May 2025, offering a glimmer of hope for policymakers but underscoring persistent challenges. The Hungarian National Bank (MNB) reported an annual inflation rate of 4.2% in April, down slightly from March’s 4.7%, but still above its 3% target. With the MNB’s tolerance band set at 3% ±1 percentage point, the data places Hungary perilously close to exceeding its upper limit.

The slowdown, however, is fragile. Core inflation—the measure excluding volatile food and energy prices—remains stubbornly elevated at 5%, while services prices surged 7% year-on-year. Meanwhile, food inflation dipped to below 4% due to government-mandated profit curbs on businesses, which temporarily alleviated pressure.

The Central Bank’s Delicate Balancing Act

The MNB has kept its base rate steady at 6.5% since September 2024, refusing to ease further despite inflation’s proximity to the upper tolerance limit. This decision reflects a cautious approach to global risks, particularly escalating U.S.-EU trade tensions, which threaten Hungary’s export-driven economy.

Analysts are split on when the MNB might cut rates. Some, like Erste Bank’s Orsolya Nyeste, argue that modest reductions could resume later in 2025 if global central banks pivot toward easing. Others, including ING analysts, predict no change until early 2026, citing persistent core inflation and the potential expiration of temporary government measures.

The MNB’s own projections are sobering. It revised its 2025 inflation forecast upward to 4.5%–5.1%, a stark contrast to its previous 3.3%–4.1% range. The central bank now expects inflation to peak at 5.6% in February 2025 before gradually declining, dipping below the 4% upper tolerance band by early 2026.

What’s Driving the Inflation Outlook?

Three factors dominate the outlook:
1. Government Interventions: Caps on food markup margins are projected to reduce headline inflation by 0.8 percentage points in April and May. But once these measures expire, inflation could rebound.
2. Global Trade Risks: The MNB warns that U.S.-EU trade disputes could worsen inflation by 0.2 percentage points and shave 0.5 percentage points off GDP growth.
3. Structural Pressures: Services inflation, driven by labor costs and housing expenses, remains a wildcard. The 7% annual rise in services prices suggests households are still feeling the pinch.

Risks Ahead

The MNB’s optimism hinges on two assumptions:
- External demand from the EU picks up, easing Hungary’s export dependency.
- Industrial investments—long delayed—finally come online, boosting productivity and curbing cost pressures.

Yet the central bank’s tolerance band framework, in place since 2015, faces its toughest test. If inflation stays elevated beyond early 2026, the MNB may need to recalibrate its policy, risking credibility.

Investment Implications

For investors, Hungary presents a mixed picture. The MNB’s “disciplined, patient” approach keeps yields high, making bonds relatively attractive compared to European peers. However, equity investors must weigh the risks:

• Bonds: Hungary’s 10-year government bonds yield ~5.8%, well above the EU average. Stability in inflation trends could support this premium.
• Equities: The Budapest Stock Exchange BUX index has underperformed the MSCI EM Europe Index by 8% year-to-date, partly due to inflation fears. A sustained decline in inflation could reverse this.

Conclusion

Hungary’s inflation slowdown offers a narrow path back to the central bank’s target. But risks—geopolitical, structural, and policy-related—are significant. The MNB’s 6.5% base rate remains a critical anchor for inflation expectations, and any deviation from its “patient” stance could spook markets.

Key data points underscore the fragility:
- Core inflation at 5% suggests underlying pressures remain.
- Services inflation at 7% hints at wage-price spirals.
- The MNB’s upward inflation revision to 5.1% for 2025 reflects missed targets.

Investors should monitor the June policy meeting closely. If inflation continues to edge downward, expect modest rate cuts by year-end. But if trade tensions flare or services costs surge, Hungary’s tolerance band could become a distant memory—keeping rates high and markets on edge. For now, the data suggests caution prevails.