Hungary cenbank unlikely to hike rates before 2018 election
project Hungary’s economic growth at 1.9% in 2016 (broadly unchanged from its Summer Outlook) and raised their 2017 GDP estimate to 2.9% from 2.5% previously.
.“Recent fiscal loosening, a supportive liquidity backdrop and improving credit conditions are the key pillars of our view," said Pasquale Diana, Head of CEEMEA Economics at MS.
He believes the prevailing macro trend should continue to be a recovery of household consumption from years of underperformance.
A supportive labour market provides a healthy backdrop to household consumption, which has averaged growth of around 5% annualised in the first half of the year. Given the extended period in which consumers were restrained, we are still in a normalisation phase, which implies that a great deal of 'pent-up' demand can be unleashed, and consumption can finally 'catch up' to peers.
Diana expects household spending to keep the economy supported in the coming years.Pre-election fiscal easing adds to wage and inflation pressures, boosts cyclical upswing in 2017
One of the key trends of the last few years has been the steady improvement in Hungary's budget position, Diana said. Some of this was due to a cyclical revenue improvement, and some also to improving tax compliance (whitening of the shadow economy), he added.Diana noted that an improving fiscal position and a solid balance of payments were two key reasons why Hungary regained its investment grade rating by all three main agencies (Moody’s Investors Service, Standard & Poor’s and Fitch Ratings) this year, a development which the analyst thinks was overdue.
“With the budget this year set to record a smaller deficit (1.4%) than originally planned (2%), and with elections looming in 2018 and growth disappointing, it is no surprise that the authorities are using the fiscal room they have created," he said.
The budget deficit estimate of MS is 2.5% of GDP for 2017 and 2.3% for 2018.
“Against a backdrop of tight labour markets, this pro-cyclical fiscal stimulus aimed at boosting wage growth risks heating up the job market further," Diana said.He continues to hold on to his thesis that inflation is likely to surprise to the upside in the coming quarters, and
his CPI forecast (2017 average:2.6%Y) is higher than the central bank’s (2.3%Y) and consensus (2.0%Y).
“With growth having disappointed and inflation still far away from target, the NBH’s dovish stance seems quite logical and not out of sync with other central banks. As both GDP and inflation rebound strongly in 2017, and the government pursues a loose fiscal stance whose stated goal is to boost wages in an already red-hot labour market, we think the NBH's dovish stance may well be challenged, and the central bank will most likely be behind the curve in normalising interest rates."Other large London-based investment houses also updated their prognoses for Hungary, forecasting that the NBH will not hurry with raising rates.
“Despite the anticipate pick-up in inflation, we continue to see the base rate on hold at least until mid-2018 and likely through end-2018," J.P. Morgan said in a research note after the central bank’s policy meeting last Tuesday.
Nóra Szentiványi reminded that the government has recently agreed with trade unions and employers on a 15% hike in minimum wages in 2017 and a further 8% in 2018 (the cost to employers will be offset by payroll tax cuts of 5%-pts in 2017, 2%-pts in 2018).“This is likely to prompt the NBH to revise up its wage growth projections in the December Inflation Report (from 6%oya for 2017 in the September Report) and should also put upward pressure on inflation in 2018," she added.
Despite these measures she doubts the NBH will raise the base rate before the spring 2018 parliamentary elections and “will look to keep the base rate on hold into 2019, tightening monetary conditions (if warranted) through other instruments, including changes to the interest rate corridor and discontinuation of the deposit cap."
