We do not believe that the outlook for Hungarian inflation is as troubling as the National Bank now seems to think. Inflation is still above target and has been rising recent months, but the pick-up has been due to a spike in global food and energy prices, which may well prove to be short-lived. Meanwhile, the risk that rising commodity prices begin to feed into underlying inflation is much lower in Hungary than it is in other emerging markets. For now, the main threat to the economy – and the principal justification for higher interest rates – stems from a fragile financial sector rather than a spike in inflation.