Hungary: May Inflation Report Summary
Overview:
A very severe economic contraction is the price Hungary is currently paying for having run pro-cyclical fiscal policy in better times. Public disaffection is high as unemployment rises but the government has so far implemented policies in line with IMF program targets. Its tax measures will push headline inflation significantly higher in the next few quarters. However, underlying inflation pressures will remain relatively muted given a very weak economic growth outlook. Headline inflation should, anyway, fall sharply in H22010 as the effect of these tax increases fall out of the calculations. With inflation likely to undershoot the 3% target on a medium-term view more rate cuts are likely. As before, they are likely to be gradual and contingent on continued improvement in sentiment towards the forint.