January inflation data paves the way for February interest rate cut

After December’s 3.3%, a significant decrease in prices could be expected, primarily due to the base effect. Compared to the previous month, prices increased by 0.3%, as expected, but the analyst consensus was higher, 0.6%. Annual core inflation did not decrease at the pace we expected, falling from 3.8% to 2.7%, but this is also well below the MNB’s inflation target.

Inflation not only fell below the MNB’s inflation target, but also approached the lower end of the target range in the first month of the year. Since the inflation figures were lower than expected, our annual average inflation expectation (in which we already felt downside risks before the data) now seems too pessimistic. February inflation could easily be below 2%. Overall, this year the annual average price increase could be several tenths of a percentage point lower than the 3.3% we are now officially expecting. Inflation figures above 3% are likely again from autumn, but much depends on what budgetary steps will be taken in the second half of the year after the elections, and how and at what schedule the margin stops will be phased out, if at all. According to the recent government announcement, the margin stops have been extended by another three months, until the end of May, which will help stabilize inflation at a low level in the coming months.

After the release of the data, market expectations and the change in the forint exchange rate suggest that it would now be surprising for the markets if there were no interest rate cut in February, but only in March. More sanguine expectations would not rule out a 50 basis point cut even this month – we believe that 25 basis points is more likely, but now in February rather than March, following today’s inflation data.