Hungarian gov't extends interest rate freeze probably beyond year-end

2024 budget

Gulyás said the cabinet still strives to have next year's draft budget adopted during the spring session of Parliament. The budget bill will be submitted to the Fiscal Council for review around 20 May and to Parliament on 30 May. The plan is to hold the final vote on it at the beginning of the following month, probably on 7 July.

The deficit target for next year is 2.9% of GDP for next year, as in its Convergence Programme submitted to the European Commission last month the cabinet raised it from 2.5% previously. The 2025 goal was upped to 1.9% from 1.5%. This year's objective remains 3.9% of GDP.

A peace agreement between Russia and Ukraine and the lifting of EU sanctions on Russia would substantially increase the room for manoeuvre in the budget, said Gulyás, explaining that inflation and the country's interest expenditure could also fall rapidly.

Defence spending could reach or exceed 2% of GDP next year, and interest expenditure could be high, he said.

Main macro assumptions for 2024

Gulyás said that the cabinet is "tied" to the central bank when it comes to its inflation target. With the MNB forecasting a 6% annual average CPI for 2024, the government assumes the same. But if the actual inflation rate is higher than that, we will raise it because of legal obligations.

Note that in its March Report on Inflation, the central bank projected inflation in 2024 to be in a range between 3.0 and 5.0%. It never said anything about 6.0%

The inflation, economic growth and debt projection numbers will be finalised before the submission of the budget bill to parliament, he said, rejecting to reveal the final numbers now.

On the economic growth plan for next year, he pointed out that "everyone today thinks that growth of 3.5-4% is achievable, we are among the optimists, so we expect economic growth of around 4%".

In addition, there is a chance of the debt ratio falling below 70%, he added in response to another question.

Can this year's deficit target be met? Well, we can't say.

In view of the fact that Hungary's budget deficit has swollen to 80% of the full-year goal by the end of April, Gulyás was asked if the cabinet thinks the target is still attainable. While noting that the deficit course is generally front-loaded in Hungary, he has admitted that the data "are somewhat worse than expected".

He said some in the government are of the view that accelerating growth in the second half of the year will help reach the target, while others believe that while H2 growth will help but the target will still be missed without further measures.

Overall, he said, it's too early to say which way the pendulum will swing, i.e. due to uncertainties the cabinet is unable at this point to say whether the nominal deficit target can be met without additional measures or not.

Interest rate freeze remains in place - But for how long?

The government has decided to extend the interest rate freeze, which was to be phased out on 30 June. It was implemented in January 2022 in retail lending and expanded to small and medium-sized enterprises in November. Gulyás said the measure protects some 350,000 families from high interest rates.

The retail loan portfolio shielded by the interest rate freeze exceeds HUF 1,360 billion, he said, noting that the scheme provided families with an assistance of HUF 80 bn in 2022 and HUF 60 bn in the first half of 2023.

As regards SMEs, some 28,500 businesses don't have to face burdens caused by the high central bank base rate, with a protected loan portfolio of HUF 1,000 billion.

For loans with an interest period of up to 5 years, the amount of repayments would rise by 24%, which is such a burden that the government believes that it cannot be passed on to the population, Gulyás said, providing a rationale for the government's decision.

Because of inflation and the level of the central bank interest rate, we cannot change the institution of the interest rate freeze, so when the base rate falls below 10%, we will lift the interest rate freeze,

he said.

This requires single-digit inflation, which is achievable by the end of the year, an expectation the government has not changed, he added.

The above suggests that the interest rate freeze will remain in place in Hungary for at least another six months, as single-digit inflation may be reached in the last months of the year, and the current 13% base rate may be cut to single-digit territory in the subsequent months at the earliest. The consensus estimate of analysts in a Portfolio survey in late April showed that the market expects the base rate to be over 11% even in December. In any case, the central bank first needs to lower the benchmark interest rate from 18% and keep closing the gap between the one-day deposit rate and the base rate.

Government may send first invoices to Brussels in a month

Gulyás noted that the government will have everything in place within a few weeks to draw down part of the 2021-2027 cohesion funds. Here, he pointed out that the justice package, which was adopted by the Hungarian parliament last week, was previously deemed acceptable by the European Commission, so if it can be formally adopted, it will free up €13 billion of the €22 billion in cohesion funding (which is not suspended by a Council decision). For this reason, Gulyás said that the government plans to be able to send development invoices in about a month to tap the available funding.

A highly upbeat government

The technical agreement reached between the European Commission and the Hungarian government, as well as the vote on the judicial reform, do not guarantee that the government will be able to send the invoices to Brussels immediately.

In line with the timetable set by European Commission rules, the government took an important step by voting in favour of legislation on four judicial issues, including the extension of the powers of the National Judicial Council, clarifying the mandate of the Curia and the Constitutional Court, and limiting prosecutorial appeals. However, Brussels will only start to assess the Hungarian reform once it is enacted and comes into force, which will be on 1 June.

The government can then send a self-assessment to the European Commission, asking it to assess the implementation of the horizontal enabling conditions linked to payments under the seven-year budget. The Commission has up to three months to do this, and only after a positive decision can the invoices be sent. Thus, the payment requests sent next month represent the most optimistic scenario.

See our (longer) opinion on the issue here.

When will inflation drop below 20%?

Gergely Gulyás expects inflation to fall radically and rapidly in the summer. He expects the inflation rate to fall below 20% in June or July, or in August at the latest.

According to the minister, the fact that significant budgetary resources were disbursed to the population at the beginning of 2022 in preparation for the elections has not caused an acceleration in inflation. According to him, they won two-thirds legislative majority and were still able to lower the budget deficit even last year.

First off, the ruling Fidesz-KDNP coalition won 135 seats in Parliament, i.e. two-thirds majority, by securing 53.1% of the votes in the April general election. Secondly, the budget deficit was 50.8% higher than the original draft budget, but after the outbreak of the war, the government revised its forecasts and managed to keep the deficit within that range.

No date yet for ratification of Sweden's NATO membership

There is no concrete date for the vote yet, Gulyás said. Asked whether the Turkish presidential elections this weekend could have an impact on when Hungarian MPs will vote on Sweden's NATO membership, he said that and other factors could also play a role.

Turkey and Hungary are the only ones in the transatlantic defence alliance that have not yet ratified Sweden's accession since last summer. NATO must agree unanimously for new members to join.

Along with Finland, Sweden applied to join NATO in May last year. Finland's application was processed in record time and it became the thirty-first member of the alliance on 4 April this year.

Orbán, who has an iron grip on his ruling Fidesz party [this is why Gulyás labelled the dispute between the party and the government as ironic], said earlier there was dissent within party's parliamentary caucus regarding the ratification, as Finland, and Sweden in particular, have been

spreading blatant lies about Hungary, about the rule of law in Hungary, about democracy, about life here.

This is why the Hungarian-Serbian oil pipeline is being built

A new oil pipeline will be built between Hungary and Serbia because it will enable Serbia to connect to the Friendship II oil pipeline starting in Russia, Gulyás said, explaining the announcement yesterday (which was actually the third one) that an oil pipeline will be built between the two countries, but he did not mention a precise target date for the project's completion.

Special taxes remain, but may be reduced

The rates of the windfall taxes will be reduced in next year's budget, Gergely Gulyás said, adding that only certain sectors are expected to see cuts.

HE STRESSED THAT ALL THE SPECIAL TAXES ALREADY INTRODUCED WILL REMAIN in place, BUT SOME OF THEM MAY BE REDUCED.

He did not give details on which sectors and what changes might be made. He promised that this would be made clear in the draft budget.

More to follow!

Cover photo: MTI/Noémi Bruzák