Hungary’s annual inflation rate fell to 1.8% in May, well below analysts’ forecasts, which suggest this paves the way for the National Bank of Hungary (NBH) to cut its benchmark interest rate this month, Reuters reports.

NBH officials discussed an interest rate cut last month for the first time since February, when they lowered the rate to 6.25% from what was then the highest benchmark interest rate in the EU. The decision was made after Hungary’s annual inflation rate fell below the National Bank’s 3% target at the start of the year.

But the war in Iran and volatility in global markets have made officials cautious, despite the potential disinflationary impact of the forint’s appreciation following the April 12 election results, which Viktor Orbán’s Fidesz party lost.

Analysts had expected consumer prices to rise between 2.1% and 2.3% in May. Core inflation also eased to 2%, also below analysts’ forecasts.

"The situation couldn’t be more favorable," said ING economist Peter Virovacz, noting that the inflation data gives the green light for monetary policy easing at the June 23 meeting. He expects inflation to peak at nearly 4% by the end of 2026 and remain within the National Bank’s tolerance band of plus or minus one percentage point around the 3% target.

"If not now, then when?" asked Virovacz, who forecasts a 50-basis-point interest rate cut.

The new government of Hungarian Prime Minister Peter Magyar has put the adoption of the euro back on the agenda, and last month secured the release of 16.4 billion euros in European funds after promising to repeal the reforms adopted by Orban that violated the European Union’s democratic standards.

In an interview with Reuters on Monday, Zoltan Kurali, deputy governor of the National Bank of Hungary, said that falling inflation and borrowing costs would likely lead to a rate cut. He noted that the NBH must carefully analyze rising energy prices and that he would take a cautious approach to any changes in monetary policy.

AGERPRES