MNI INTERVIEW: Hungary Outlook Stagflationary - Ex-NBH's Reiff

Hungary’s inflation outlook is likely to deteriorate during 2025 given likely government giveaways ahead of next year’s elections and as de facto caps on services prices are eventually removed, a former Hungarian National Bank economist told MNI.

Whether the central bank will be able to achieve inflation within its forecast range of 4.5-5.1% this year will depend on the government, which has a history of cutting direct taxes on workers while raising industry-specific taxes, said Adam Reiff, a senior research fellow at the Centre of Economic and Regional Studies, Institute of Economics (HUN-REN Hungarian Research Network) (See MNI EM INTERVIEW: Hungary Price Caps To Boost Inflation- Ex-NBH)

“If there are no [more] such measures, then maybe the insufficient demand will dominate the inflation process, and maybe there is room for a small decline in inflation. But my best forecast is that they will do something, in which case inflation could increase considerably,” Reiff said in an interview, as the government raised its fiscal deficit target for 2025 from 3.7% of GDP to 4.1% on Wednesday.

 “I'm pretty sure that the much larger cumulative inflation of recent years is by-and-large part-explained by these indirect taxes through companies or the services sector.”

CENTRAL BANK

The National Bank of Hungary once again stood pat on interest rates in May, leaving the base rate 6.5%, and said it sees very little scope for easing this year despite highlighting the economy’s weak Q1 performance, a stance which Reiff considers appropriate.

“The NBH will have to hold steady, even though the presence of insufficient demand would call for loosening the monetary policy stance,” he said, adding that voluntary mortgage lending caps and supported lending schemes mean the base rate is not as relevant for households and businesses as it might otherwise be.

“Banks will find other ways to recover the fees lost on mortgages, so while such measures might offer a boost to the housing market, I’m not sure they are a useful instrument for boosting the economy or keeping inflation down.”

Though inflation will not hit double figures this year as previously expected - thanks largely to earlier negative surprises in the processed food and energy sectors, the services caps and a decline in oil prices since last year - the outlook looks increasingly stagflationary, he said.

PRICE CAPS

Monthly services price hikes were higher at the beginning of 2025 than in previous years, but fell in March and April, likely due in part to the government’s request that they not increase prices any further, Reiff said. At the same time, data for May pointed to a rise in inflation to 4.4%, from 4.2% in April, due largely to increases in food prices.

“Retailers are already complaining that price cap measures are not sustainable and will inevitably lead to some shortages. So something will have to be done. Whether this will be before the elections next April or only after the elections. I cannot predict, but at some point price caps will have to be abandoned because they are simply not sustainable.”

Domestic price expectations remain elevated despite some moderation over recent months, Reiff said.

“Inflation expectations in Hungary tend to be backward-looking, which is bad news in the current situation because the recent decline in inflation is likely to be overridden by the very negative experience of two-three or three years ago,” he said.

“I can also imagine that in addition to being high and persistent they are also especially sensitive, especially to changes in food prices, where inflation has been as high as 40%.”