MNI INTERVIEW: Hungary Central Bank Faces Volatile 2025-Kiraly

The National Bank of Hungary is likely to cut interest rates by 50 basis points in May and June with inflation set to end the year close to target, a former senior NBH official told MNI, but she added that expansionary fiscal policy, budget deficits and uncertainty over the Bank’s leadership mean the “relative calm” of 2024 may give way to greater volatility next year.

“I can imagine that they will maintain the current 50bp cut pace, which will take interest rates to around 6.5%, after which they will be kept at a high level,” said Julia Kiraly, who served as deputy governor from 2007-13, “or they will wait and see, which is always sensible.” (See MNI NBH Review - April 2024: Caution Still the Mantra)

The European Central Bank’s rate-cutting path could also determine whether the NBH cuts in greater increments, she said. “But a lot depends on the new central bank after the end of Mr [Gyorgy] Matolcsy’s second term [as governor] in 2025. There is a lot of conflict behind the scenes, so although 2024 will be relatively calm, 2025 will be crucial.”

Annual inflation was 3.7% in April, and is anticipated to pick up somewhat during the second half of the year. Kiraly did not expect the pace of price rises to hit the target rate of 3%, though the central bank will be able to declare victory if it falls to 4% - within the upper limit of the tolerance band.

“I would say price stability is when we hit 2%, but with market service inflation at between 6% and 9% and sticky, and the labour market still tight, my feeling is that it will end up around 4% or a little bit higher,” she said.

LONG-TERM NATURAL RATE

Coming back from a peak in the base rate of 13% in September 2022 has to be done “carefully,” Kiraly said, noting that with nominal rates now at 7.75% real rates are “significantly” higher than former estimates of the long-term natural real rate of interest.

“Three percent cannot be the focus of the long-term natural real rate, and if it is, then I don’t know what will happen to the Hungarian economy. Certainly the budget will blow up,” she said.

Fluctuating exchange rates remain a source of uncertainty with each 1% depreciation in the forint leading to an increase in inflation of 0.6-0.7%. “In a volatile country like Hungary the exchange rate against the euro is likely to fluctuate between 370 and 430 at any time. That makes life very difficult for the central bank,” she said.

Growth will miss the government’s annual target of 4% in 2024, Kiraly said, while the upper end of the central bank’s 2-3% projection is also in question after recent industrial production figures - “always a good signal regarding future GDP” - proved “discouraging.” (See MNI EM INTERVIEW: CEE Recovery, Risks Remain - WIIW Economists)

The Hungarian government announced plans to delay fiscal spending worth USD1.8 billion in April, as it admitted budget deficits for the year will swell to 4.5% of GDP. April’s deficit subsequently came in at HUF276 billion, the lowest monthly figure this year, while the decision to trim this year’s budget was received positively by ratings agencies.

Further spending cuts can be expected, Kiraly said, but tax rises remain off the agenda ahead of 2026’s parliamentary elections. (See MNI EM INTERVIEW: Hungary Deficit Target "Realistic", Not Assured)

“After the June elections everybody expects some kind of consolidation of the budget. But 2025 is a pre-election year, so the government will not stop spending, especially in what may be a very tight political situation. Certainly the government will not push down public sector wages, nor can it do anything with pensions.

The budgetary burden of pensions “is now huge” following the addition in 2022 of a thirteenth payment to the 12 previously paid each year.