MNI INTERVIEW: Hungary Fiscal Boost An Inflation Threat
MNI (LONDON) - The Hungarian government’s shift to an expansionary fiscal stance will make it more difficult for the National Bank of Hungary to control inflation over the coming months, a former senior central bank advisor and European Commission official told MNI.
While budgetary policy has been restrictive for some time, putting it in sync with the NBH’s monetary stance, incoming European funds will have a “not inconsiderable” stimulative effect, Istvan Szekely said in an interview, noting that European Commission forecasts indicated a shift to fiscal expansion this year.
“Private consumption has been the driving force of growth, despite historically high household savings. Hence, trying to further stimulate consumption by fiscal means is not necessarily good for inflation, especially when wage growth is in the double-digits,” he said in an interview.
The NBH is waiting for further inflation data before deciding whether to reset its policy rate from 6.5%, after having indicated it could remain at that level for an extended period. (See MNI POLICY: NBH March Projections Key To Policy Outlook)
High public borrowing, combined with elevated risk premiums that have pushed up interest costs, which are already the highest in the EU as a percentage of GDP, will place a heavy burden on state finances and constrain policy choices “significantly,” said Szekely, who was principal advisor to the European Commission until 2024.
“One problem is the government’s belief that they can achieve certain things in the economy with a very strongly interventionist approach. The frequency and volatility of the interventions and the communication around them are something which is not what a modern market economy needs,” he said. “It is extremely difficult for economic agents to make forward-looking investment decisions when something fundamental - such as the tax system or renewable energy subsidies - changes abruptly, sometimes from week to week.”
Upcoming German federal elections - expected to see incumbent Olaf Scholz lose to centre-right challenger Friedrich Merz - have important implications for Hungary, Szekely said, noting that the ambition of the Germany’s former “Traffic Light coalition” to shut down nuclear power stations had had a considerable effect on the broader policy environment.
SHIFT TO CHINESE OWNERSHIP
At the same time, the shift in the balance of one of Hungary’s most important industries - car making - from predominantly German to, increasingly, Chinese ownership is very significant, according to Szekely.
Hungary’s long inflationary episode saw cumulative gains in consumer and producer prices of over 50% and of nearly 80% respectively, feeding a real appreciation of the forint which has still to be fully reversed, Szekely said. This has proved especially damaging for a country reliant on manufacturing exports and lacking in innovative firms in dynamic sectors.
“A weak euro is not bad for the European economy at this stage, particularly because euro area inflation is okay at the moment. The problem in Hungary is that while we would need a weaker forint to support the economy, the policy rate needs to be kept high to tame further depreciation and, through this, keep inflation in check. A high-pressure economy is something you can do in the short term when you have a stable external environment, but at some point, you pay the price. And this point has just come.”
While the precise impact of possible U.S. import tariffs is unclear, Szekely saw a potential upside for Hungary from the arrival in power of President Donald Trump, as it could lower tension between Washington and Budapest, following years of criticism for Prime Minister Viktor Orban from former President Joe Biden.
“If those issues become less intensive or less prominent, this will impact investors' decision-making. If the style and the language towards Hungary change, it will help improve market expectations,” Szekely said.