Subdued inflation, helped by a firmer Hungarian Forint (HUF) and government steps such as fuel price caps, has left the National Bank of Hungary (NBH) with more room to adopt a dovish stance, even after an energy price shock. Headline CPI was 1.8% year-on-year in May, under Standard Chartered’s 2.2% forecast and below the lower edge of the NBH’s 3% ±1 percentage point target band.
Standard Chartered has trimmed its CPI outlook for 2026 to 2.2% from 3.9%, which it says still sits above the central bank’s own projection. For 2027, it now expects 2.5%, down from 3.4%. The NBH characterises inflation risks as balanced, but the bank points to upside risks tied to Hungary’s sensitivity to geopolitical instability; in that scenario, the pace of easing could be slower than anticipated.
NBH Rate Cuts and Implications for the Forint
Given the National Bank of Hungary’s recent rate cut to 4.50% last week, we see a clear dovish path being carved out. This move was justified by May’s headline inflation figure coming in at a low 1.8%, which is well below the central bank’s target band. The market is now pricing in further easing, creating momentum that we need to act on.
This environment suggests continued weakness for the Hungarian Forint, especially as interest rate differentials with the Eurozone narrow. We should consider positioning for a higher EUR/HUF exchange rate, which currently hovers around 405. Recalling the forint’s sharp declines during previous periods of monetary easing, such as the cycle that followed the 13% rate peak in 2023, provides a strong historical precedent for this view.
Strategy and Risk Management
However, we must also hedge against the upside risks to inflation from geopolitical tensions, particularly the renewed friction with Brussels over funding. We believe buying cheap, out-of-the-money EUR calls against the HUF is a prudent strategy. This allows us to capitalize on the expected gradual weakening of the forint while providing significant upside if geopolitical risks flare up and cause a sharper depreciation.
The cost of these options is still reasonable, although we have seen three-month implied volatility tick up from 8.5% to 9.2% in the last week. This indicates the market is beginning to price in more uncertainty. Acting in the coming weeks allows us to establish these positions before potential volatility makes them more expensive.
