CPI-inflation and cash budget deficit: bad news and good news

HUNGARY - In Brief 08 Jul 2022 by Istvan Racz

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The forint is trading around EURHUF405 again, even though the MNB sold €1588m in exchange for forints for three days in reverse swaps today. Amidst these circumstances, key fundamental data appears to be particularly important. In that regard, there has been equally bad news and good news today. The ugly part was the June CPI-inflation number: the headline rate went up to 11.7% yoy from the previous month's 10.7%. Food price inflation (27% of the consumer basket) accelerated to 22.1% yoy. Core inflation was even worse, rising to 13.8% yoy from May's 12.2%.  This all looks bad, but it is important to see that the June actuals were pretty much in line with the forecast given by the MNB's Q2 inflation report. In fact, 11.7% was the bottom of the MNB's forecast range set for June's headline rate. The good news, at least in relative terms, was a further narrowing of the central government's cumulative cash deficit ratio for this year in June. The monthly deficit was HUF155bn, an annualised 3.2% of GDP. As a result, the H1 annualised deficit ratio was 9.8% of GDP, down from 11.3% in January-May and the from the peak 16.2% in Q1. To us, this means that fiscal stabilisation is indeed underway, and this will be terribly important, given the need to slow down domestic demand growth and the extra burden implied by rising energy prices.