Hungary's Orbán announces extension of price caps

Gov't decides to keep price caps in place for longer

Given that key price freezes were to expire on 1 July, the cabinet's meeting on Thursday was bound to take a decision in this regard. In this sense, today's decision to extend the measures is not entirely unexpected.

Here are the main decisions:

• the price cap on seven basic foodstuffs is to remain in effect until 1 October 2022 (it would have expired on 1 July);
• the loan repayment moratorium and the interest rate freeze on mortgages have been extended until 31 December 2022 (the latter was to expire on 30 June),
• the fuel price cap will remain in effect until 1 October 2022 (instead of 1 July).

The government is to keep the price control measures on motor fuel and food prices in place for another three months, while the interest rate freeze has been extended by six months.

The decrees on the government's decision are expected to be published in Thursday evening's Official Gazette, so it should be clear in a few hours whether these measures will remain with us unchanged or whether the government will adjust them. Indeed, in recent weeks there have been suggestions that they should be maintained.

Implications

The government last decided on price freezes at the end of April, and the pressure on foodstuffs and fuels has not let up ever since, quite the contrary in fact. Meanwhile, the inflation outlook has also deteriorated over the last few weeks, and there have been an increasing number of reports both in Hungary and abroad of upside risks to inflation.

Moreover, the persistently weak forint is not exactly positive for consumer prices. Against this background, it is not surprising that the price freeze measures are maintained and extended, but it should be noted that their continuation in the longer term implies increasing distortions, losses for some economic operators and supply risks.

The cap on fuel prices (HUF 480 per litre) does act as a permanent rein on inflation, but it has crowded out wholesalers from the market, effectively leaving Mol as the sole player, which could create supply challenges in the coming period, as supply has been reduced. The food price freeze does not have such a large impact on CPI, though.

Retail chains can choose literally thousands of products to make up for the losses the price freeze causes by raising their prices, and they have been doing for months. In effect, there are seven products with their prices capped at their October 2021 level, while it's free-for-all situation when it comes to the pricing of all the other goods. Not to mention that the marked hike to the special tax on the retail sector will fuel intentions to raise prices some more.

The prolongation of the interest rate freeze is linked to rising interest rates that are expected to remain high persistently, putting another burden on the banking sector. The measure sends the message that those who borrowed at a fixed rate (more expensive) are worse off than those who borrowed at a variable rate (cheaper), as the government is preventing the rise in repayments.

The interest rate freeze protected 330,000 households with mortgages in the first half of the year. If it had been lifted, repayments would have jumped by an average of a fifth, and the outlook in this respect is worsening as interest rates continue to rise.

To complicate matters, fixed-rate loans have also started to be threatened by interest rate risk: 133,000 of these borrowers will also have their loans change interest rate period sometime between 2021 and mid-2023. So it is a foregone conclusion that the government will not accept the two alternative proposals of the Hungarian Banking Association, presented by its president Radovan Jelasity in an interview with Portfolio on Tuesday.

Although we do not know the details of the government's current decision, it seems to be a simple extension, i.e. banks will have to adjust the interest rate and repayment period of variable-rate mortgages in the second half of the year to the BUBOR of 27 October 2021.

Banks will therefore have to pay a large part of the rising interest rate environment (currently around 80-90%), which could cost the banking sector around HUF 50 billion in the second half of the year, up from HUF 30-40 billion in the first half, and the burden could increase further due to central bank interest rate hikes. The interest rate freeze could therefore cost banks up to HUF 100 billion this year.

As for the extension of the moratorium on loan repayments, the burden on the bank is much lower than that of an interest rate freeze. Currently, around 5% of retail loans and around 2% of corporate loans are covered, for whom the extension means that they will not have to repay the loan for almost three years from 19 March 2020 and the bank will not be able to terminate their loan contract.

Hungary's repayment moratorium was already the longest and most generous in Europe, but the recent measure shows that the government sees the solvency risks as quite high for the second half of the year, mainly driven by inflation and, for businesses, by a sharp increase in overheads. The credit moratorium was also due to expire on 30 June.

Cover photo: Hungary's Prime Minister Viktor Orbán votes at a plenary session of Parlament on 14 June 2022. Source: MTI/Zoltán Balogh