MNI INTERVIEW: Good Start By NBH's Varga, Tests Ahead - Ex-Gov

Hungary’s new central bank governor has made a good start by holding rates and emphasising a cautious approach to policy, one of his predecessors told MNI, but with growth faltering and the government likely to deploy fiscal firepower to sway voters before next year’s elections, decisionmakers face a difficult time ahead.

Mihaly Varga’s NBH, which left rates at 6.5% despite March’s lower inflation, is right to be wary of upside risks to the outlook including tariffs, according to Andras Simor. (See MNI EM NBH WATCH: Hungarian Rates Unchanged, Base Rate 6.5%)

“If I were the NBH at this juncture I would probably sit on my hands for a few months,” Simor, governor from 2007-2013, said in an interview. “For the time being there's nothing happening in the markets that would force me to change anything. The forint is relatively stable. Government bond yields are relatively stable. There's no reason to jump.” (See MNI EM INTERVIEW: Varga Calms Cloudy Outlook - Ex-NBH's Kiraly)

Growth remains a major concern, he said, as confirmed by Wednesday’s flash estimates, which showed first quarter GDP fell by 0.4% on the same period of 2024, following a year in which the economy expanded by the same amount.

Economic forecasting over the next 12 months is complicated by the introduction of administered prices and government efforts to constrain price increases by certain services providers, Simor said. 

These may dampen inflation for a while, but neither measure is sustainable in the longer term, with “larger” increases possibly as early as the second half of 2025 or in 2026.

At 1.5%, annual economic growth will be half the level anticipated by the government last year, Simor said, putting pressure on its budget, which was already expected to run a deficit of at least 3.7% of GDP.

“As a market participant said to me recently: we are constantly being operated on. So making forecasts about the economy is extremely difficult, and this is certainly not going to help lower households’ medium- to longer-term inflation expectations - particularly as we’ve had the highest inflation in Europe for the last couple of years,” Simor said.

ELECTION AHEAD

That will not stop Prime Minister Viktor Orban trying to dent support for challenger Peter Magyar’s Tisza Party with fiscal giveaways, with negative consequences for inflation, he added.

“I would suspect that a spending spree is coming, and the government is not going to wait until next year. They have already taken a few measures early this year, but the money involved is not yet too much.

“Under these circumstances, the central bank is going to be put into a squeeze. If the slowdown in the economy is not caused by lack of domestic consumption, that means that inflation is not going to come down quickly. If the government starts spending, that is going to push inflation higher. Then the question is: can the central bank still stick to this wait and see attitude, or do they have to put rates up?”

The NBH will also face difficulties if, as a result of missing its budget deficit target, one of the ratings agencies were to move to downgrade its assessment of Hungary, potentially weakening an already volatile forint.

“Of course, the central bank can just buy domestic currency and sell down their international reserves to protect the currency, however I don’t think there is a lot of headroom in the hard currency reserves,” Simor said.

WAGE GROWTH

Labour markets are tight and wage growth still strong, Simor said. Though there is little sign that such increases are driving inflation via increased consumer spending, inflation will worsen again if pay rises are not matched by improvements in either productivity or efficiency, or if firms are unwilling to lower profit margins and instead raise prices. 

Nor, Simor said, can Hungary expect its main trading partner’s recently-announced EUR500 billion fiscal package to offer more than “minor” spillover benefits.

“There might be some indirect benefit from a general uplift in demand within the German economy - some more cars being built and sold, for example - but Hungarian companies will not benefit greatly from Germany’s investments in its own infrastructure and defence.”