MNI INTERVIEW: NBH Rates On Hold Until At Least April - Ex-Gov

The National Bank of Hungary will leave interest rates unchanged at least until April’s general election has passed, absent a major deterioration in the inflation outlook or a significant weakening of the exchange rate, former governor Andras Simor told MNI.

The NBH last week left its base rate unchanged at 6.5% and said it expects inflation to stay above the tolerance band for the remainder of this year, with new projections showing the pace of price growth almost unchanged against June’s exercise, at 4.6% this year and 3.8% in 2007, before finally hitting 3.0% in 2027. (See MNI EM NBH WATCH: Rates Held, Projections Broadly Unchanged)

“I would not give the chances of a rate hike before April more than 1% probability. Unless there is a total collapse of the world financial markets, or the central bank has to step in to defend the forint for some reason,” Simor said in an interview. “We also have a central bank governor who was a member of the government and a minister for more than 10 years, therefore I think it is practically impossible that they would raise rates on the basis of projected inflation.”

Government-imposed mandatory and voluntary price caps have had a clear disinflationary impact, and will almost certainly remain in place right up to next year’s parliamentary elections, though, once they are lifted, companies will move to hike prices, particularly given growth in wages, Simor said.

HOUSE PRICES

While house prices are not included in measures of CPI, Hungary is already facing significant inflation in the sector, fueled by government-promoted subsidised loans for first-time home-buyers, Simor said.

“These cheap loans are pushing house prices higher at a very fast pace. Maybe it will stimulate some more house building, although the record of the government in this respect is not good: they have been subsidising housing loans for years, and house building has not gone up. In fact, it’s gone down,” Simor said. (See MNI EM INTERVIEW: NBH FinStab Move Signals Clear Concern - Ex-DG)

Introduced into an “already active” housing market, the annual growth of household loans outstanding is seen close to 20% this year and around 22% in 2026, the NBH has said.

Contrary to central bank hopes of a modest pickup in GDP from a downgraded +0.6% this year to 2.8% in 2026 and 3.2% in 2027, Hungary’s “clearly stagflationary” economy faces deep structural issues, with industry, construction and agriculture in decline, and only real estate, financial services and the communication sector experiencing growth. Consumption, while increasing steadily, is far from robust, he added.

“That makes the job of the central bank extremely difficult. They cannot raise rates because the economy is already not performing. They cannot cut them because inflation is persistently higher than the 3% inflation target and inflation expectations are also well above the target.”

Households’ expectations in particular have been conditioned by recent experience of one of Europe’s highest inflation rates, Simor said. Coupled with tight labour markets - especially for skilled workers - that means strong private and public sector pay rises are set to continue, having already outpaced productivity growth by a ratio of 5:1 annually for the last decade.

“The government has taken over the traditional role of the unions in pushing wages higher, resulting in a 13% increase in the minimum wage agreed for next year. In an economy with close to zero growth and inflation of 4-5% that doesn't make any sense. But that's the way they think they can win the elections.”