Hungary's inflation rate slowed more than anticipated last month, strengthening the case for the central bank to continue cutting interest rates.

In August, consumer prices rose by 3.4% year-on-year, marking the slowest rate in 3.5 years, according to data released by the statistics office on Tuesday.

This is down from 4.1% in July and lower than the 3.6% average estimate from a Bloomberg survey of 22 economists.

Hungary's central bank halted its rate-cut cycle last month after 15 consecutive monthly reductions, following a surge in inflation. Tensions have arisen between the government and the central bank regarding the pace of easing, with Economy Minister Marton Nagy stating this week that inflation worries were exaggerated, claiming that price growth had been “defeated” for good.

“The fresh inflation data definitely opens the way for Hungarian monetary policy to cut the key rate by 25 basis points in September,” stated Peter Virovacz, an economist at ING Bank Hungary. He added that prolonging the rate pause was also a “realistic option.”

The central bank aims for a 3% inflation target, with a 1 percentage-point tolerance band. Prices remained stable month-on-month, while annual core inflation, excluding volatile food and energy prices, was at 4.6%.

Last month Deputy Governor Barnabas Virag said that the timing for resuming rate cuts in Hungary will depend not only on domestic price trends but also on anticipated rate cuts by the US Federal Reserve and the European Central Bank, as well as assessments of risk and economic confidence.

He added that each rate meeting this year will consider both a quarter-point cut and a decision to keep rates unchanged. The central bank maintained its key rate at 6.75% in August, which is the highest benchmark rate in the European Union, Bloomberg reports.

The decision is further complicated by the Forint's recent performance, which has fallen 1% against the Euro to its weakest level in a month. 

This decline followed Bloomberg's report that Prime Minister Viktor Orban might abandon budget consolidation plans ahead of the 2026 elections. 

Over the weekend, Orban outlined spending measures for the coming year but stated his commitment to maintaining stable public finances.

“While the favourable data” for inflation “may raise the case for the central bank to loosen policy at its next meeting, this is best avoided given the overall picture,” said Janos Nagy, Erste Group Bank analyst in Budapest.