MNI INTERVIEW: Gov Schemes Put NBH Focus on FX - Ex-DG Kiraly

Government caps on prices and profit margins mean National Bank of Hungary monetary policy is increasingly detached from inflation targeting, and it is likely to keep rates on hold for some time barring an event such as a forint selloff, former deputy governor Julia Kiraly told MNI.

“The central bank is targeting the exchange rate, rather than the inflation rate - not least because the interest rate channel is more and more noisy due to government intervention, such as, for example, the 3% benchmark for mortgages, all kinds of subsidies for small entrepreneurial loans, etcetera. The interest rate channel simply doesn't work,” Kiraly said in an interview.

The NBH left key rates unchanged in June after inflation rose to 4.6% from 4.4% in May. With the Bank anticipating headline inflation to end the year between 4.5–5.1%, base rate is expected to remain at 6.5% this month, having last changed in September 2024, when it was eased by 25 basis points. (See MNI EM NBH WATCH: Policy Hold, But Stagflationary Risks Seen)

Near-zero GDP growth means Hungary is very close to stagflation, even though inflation is not too far from target, according to Kiraly.

“If nothing big happens then I think we’re in for a long period of wait-and-see - at least until the 2026 elections,” she said.

“If there is an emergency situation - a sharp deterioration of the exchange rate, let’s say - the central bank should increase the interest rate, and I have no doubt that they will. Otherwise, I see no need for them to do so. The fundamentals are really stable; the exchange rate is relatively solid. Yes, there are threats, and you can never know what will happen tomorrow, but I do not think the MNB would hesitate to act if it had to.”

FISCAL STRAINS

Core inflation - 4.3% in June - is unlikely to fall quickly, Kiraly said, with households’ and firms’ inflation expectations anchored to the exchange rate.

“This is particularly the case in the services sector, where it’s effectively the only benchmark they follow,” she said.

The government’s announcement last week of cheap loans for first time-home buyers will push the budget deficit to 4.5% of GDP this year, versus the target of 4.1%, and to around 8% in 2026, Kiraly said.

Rising property prices will not add to overall inflation, as neither house prices or rents are included in HICP, but “some kind of financial instability will be built into the system once again,” Kiraly said.

The former official also pointed to the country’s increasing reliance on foreign borrowing, with the share of FX debt relative to total debt seen breaching the 30% this year. (See MNI INTERVIEW: Space For More CNY Issuance By Hungary-Official)

“Don’t forget that some 15 years ago the new government stated that the share of foreign exchange debt should be below 15%. Then the limit was increased to 20%, then to 30% - and that can also be surpassed,” Kiraly said.

CREDIT RATING

“That’s not a problem until there is an emergency situation in the global financial market. As long as markets are quiet Hungary is a small country that can refinance itself. But if anything happens - and we’ve seen this before - it immediately has a negative effect.”

In April, S&P Global Ratings revised its outlook on Hungary to negative from stable for its BBB- rating, the lowest rung of investment grade, warning of spending pressures ahead of next year’s elections, and Kiraly said a downgrade could prompt sales by international funds similar to those seen in 2012, when the Templeton Global Bond Fund emerged as a significant buyer.

“The worry is that if the same thing were to happen again there would not be a Templeton to save Hungary this time,” Kiraly said.