Hungarian central bank knocks down GDP and raises inflation forecasts

Hungarian central bank knocks down GDP and raises inflation forecasts
The MNB expects inflation to return to the central bank tolerance band of 2-4% in H2 2023, before reaching the 3% target a year later.
By bne IntelliNews March 25, 2022

The Hungarian National Bank (MNB) has hiked its inflation forecast for this year to an average of 7.5-9.8%, up from 4.7-5.1% in December, and slashed its growth forecast to 2.5-4.5% from 4-5%, as the country braces for the full impact of Russia's invasion of Ukraine on commodity prices and global growth.

In its quarterly inflation report on March 24, the bank explained the radical revision of its forecasts on supply side effects and price shocks from higher commodity and energy price. Yet it added that with the fading of the first-round effects of war tensions, the decrease in external inflationary effects as well as a result of the central bank’s proactive measures, headline inflation would be 3.3-5% in 2023 on average, returning to the central bank tolerance band of 2-4% in H2 2023, before reaching the 3% target a year later.  However, the outlook for inflation is mostly surrounded by upside risks, they added.

MNB sees core inflation rising to 7.9-9.4% in 2022 before dropping to 3.7-5.1% in 2023 and 2.7-3.3% in 2024.

"Over the medium term, after the wearing off of the repeated price shock, anchoring inflation expectations at a level consistent with the inflation target will play a crucial role in achieving price stability," the MNB said.

Policymakers expect inflation to accelerate from 8.3% in February, the highest in 15-years, to 8.5-9% in March.

Government measures to cap fuel and food prices have shaved 2.2pp off the headline data in February, but due to rising fuel prices, this could reach 4.2% in March.

The MNB has also slashed its 2022 growth forecast to 2.5-4.5% in the fresh report from 4-5%, and next year’s forecast from 3.5-4.5% from 4-5% to 3-4%.

The macroeconomic impact of the war, as well as sanctions on Russia, would reduce Hungary's exports as trade with Russia and Ukraine fall, growth slowdowns on external markets and supply chain interruptions will weigh on the economy, which was on track for a growth of 5-6% on average for 2022 and 8-9% y/y in Q1.

Higher energy prices and inflation will increase uncertainty, resulting in a deceleration of lending and lower investments, while a slowdown in wages and transfers, adjusted for inflation, will cause lower consumption, Balatoni told the press after the report.

The impact of the war and sanctions would shave 2.5pp off Hungary's economic growth, with higher energy prices and inflation reducing the headline figure by 1.0pp, slowing lending and uncertainty by 0.5pp, direct and indirect effects on trade by 0.3pp, and slower growth on export markets and supply chain interruptions by 0.7pp. While the MNB acknowledged a "high degree of uncertainty" surrounding Hungary's short-term economic outlook, it said the fundamentals are solid.

Hungary’s current account deficit is likely to rise in 2022, reflecting the combined effects of poor external demand on the export side and high energy prices on the import side, which both point towards a deteriorating trade balance. The MNB sees a rapid improvement from 2023 and the balance could turn positive by the end of the forecast horizon, or in 2024.

The Russia-Ukraine war has increased budgetary risks, but the MNB has left its targets unchanged, calculating a deficit of 4.9% in 2022, 3.5% in 2023 and 2.5% in 2024.