Retail interest rate freeze to be abolished when consumption recovers in Hungary - EcoMin
Interest rate freeze will be phase out when...
The interest rate freeze can be criticised, but no one has argued that the banking sector would have suffered credit losses if high central bank interest rates had been imposed on the population, Márton Nagy said.
The interest rate cap maintained the quality of loan portfolios, protected the economy and therefore was a successful and necessary intervention,
said Nagy.
The government has already managed to abolish the SME interest rate freeze, and is working on phasing out the retail interest rate freeze, which is conditional on consumption recovering and the economy getting going.
A scary sight
The Hungarian banking system has never seen such a high interest rate environment as last year, and it has also brought tensions to the surface that we have never seen before.
THE HIGH INTEREST RATE ENVIRONMENT MAY BE GOOD FROM A PROFITABILITY POINT OF VIEW, BUT a banker SHOULD consider it as A SCARY PHENOMENON.
2023 was the year of the great struggle to bring down inflation, tackle the twin deficits and turn real wage growth into a positive figure, at the cost of a mild recession and a 6.5% [of GDP] budget deficit, the minister said.
Inflation could be around 4.5% this year
The government expects annual average inflation around 4.5% in 2024, and a pension hike of 6%, i.e. an increase in real terms. The latest consensus estimate of analysts polled by Portfolio shows 4.3% annual average inflation for this year.
Inflation in Hungary has stopped falling, with consumer prices up by 3.7% year on year in April 2024 from 3.6% in March. The median forecast of analysts polled by Portfolio was exactly 3.7%, so the figure comes as no surprise. Inflation has risen after 14 months of decline, and although expectations are for the indicator to creep above 5% by the end of the year, no huge price pressures are on the cards.
Retail lending booms
The retail credit market is doing well, better than the corporate market. It is not simply a question of the state helping (e.g. with the family housing subsidy CSOK Plus): normal market lending and demand for second-hand housing is rising significantly on its own.
THE HOUSING LOAN MARKET IS getting stronger, NOT TO MENTION PERSONAL LOANS. COMPANIES, ON THE OTHER HAND, ARE MORE CAUTIOUS ABOUT BORROWING,
but their cautionary motive seems to be easing. The growth recorded at loan contracts is not accompanied by an increase in the stock of loans, with new loan contracts tending to be replaced by loan restructuring. We last wrote in detail about developments in the credit market here:
Gov't wants inclusive growth
According to the minister, an important economic policy issue is the inclusiveness of growth, i.e.
if NOT ONLY LARGE COMPANIES, BUT ALSO SMES AND NOT ONLY THE UPPER BUT ALSO THE LOWER STRATA OF SOCIETY were affected.
The most important element of this is the continued rise in employment, but also the activation of the 300,000-strong Hungarian labour reserve. This will require raising the employment rate to close to 85%. The number of inactive people has been reduced by 77,000 in the last year, and the rise in the unemployment rate is positive in this context: it is rising because of those who move from inactivity to activity, register and look for work. They are mainly young people under 35 with low level of education. The home renovation scheme also has a significant role to play in increasing inclusiveness (as it is mainly used by lower-income rural homeowners), as does the reduction of fuel prices.
New EU programme to support electric vehicle purchases
Hungary wants to use its presidency of the European Union (from July) to support electromobility, which would mean infrastructure development at European level, corporate support and incentives for citizens, said Márton Nagy. We will put our proposals on the table of all EU member states, he added.
The government would promote the purchase of not only new but also second-hand electric vehicles,
a key element of which would be the creation of a standard that would assess the state of the battery in the used cars.
Commercial banks gained HUF 1.7 trillion worth of interest income from the MNB - central banker
The credit penetration of the Hungarian banking system is around 30% of GDP, the same as in the first half of the 1990s, with no progress made since then, although the ratio was around 60% around 2008.
The number of banks has also declined in recent years, and we have witnessed a significant consolidation over the last decade. The number of bank branches has also declined significantly, while the number of employees has remained more or less stagnant. Profitability has been influenced by a number of domestic and international events over the past 35 years, with average ROE of 10% since 1990, higher than the average inflation rate of 7.5%, but below the average annual increase of 14% in the stock market.
Credit penetration as a share of GDP needs to be increased, according to the central bank
Effective, safe and innovative banking is the key to successful economic convergence, the Deputy Governor of the MNB.
Increasing credit penetration is an essential part of being effective, and there will be no sustainable and successful catching up without it.
We are lagging far behind: the Hungarian private sector's credit-to-GDP ratio is only a third of the EU average and half the regional average. We are also using the stock market less than necessary to finance the economy, and the financing of the green transition needs to be more robust, while the digital transition is irreversible. On the latter, he pointed to cyber risks: fraudsters are now not only taking customers' money, but also taking credit for them, causing them harm.
Fintech takes off, data-based banking spreads
Fintech firms already accounted for 5% of global banking revenues in 2022, and this could rise to 8% by 2028, according to global analyses, said Barnabás Virág. The MNB is also working hard to further develop the instant payment system, and artificial intelligence suggests that in the long term it is not inconceivable that we will be able to pay with our thoughts.
AND THE TRANSITION TO COMPETITIVE FINANCE CAN ONLY BE ACHIEVED THROUGH A COMPLETE DATA REFORM,
According to Virág, Hungary should also make use of the huge amount of data available to provide even more advanced services, so big data will be a key element of digital banking, and those who will succeed will be those who move ahead quickly.
Banking Association President: it is difficult to win the race with a double burden on our shoulders
In his speech, recalling the history of Hungarian banking advocacy, Radovan Jelasity, President of the Hungarian Banking Association, also spoke about one of the most important liability issues of the banking system, retail foreign currency lending, saying that banks "danced until the music played" and there was no one to turn off the music in time.
Subsequent government measures, including the introduction of the bank tax and the foreign currency lending measures, have had a long-term impact on the banking system. After the conversion of FX loans into forint and the bankruptcy of several brokerage firms, the banking system then entered a new growth path, followed by a period of credit market support, sustainable growth and digitalisation.
The coronavirus pandemic in 2020 and the war in 2022 posed a number of challenges, but the banking sector coped successfully with the support of the government and the MNB. Meanwhile, public charges introduced for a transitional period have stagnated and fintech challengers have strengthened. With a double burden, Hungarian banks are finding it difficult to compete.
Nevertheless
THE HUNGARIAN BANKING ASSOCIATION IS ONE OF THE MOST IMPORTANT INTEREST GROUPS IN HUNGARY TODAY,
said Jelasity. This year, the traditional Golden Hive (Aranykaptár) Award of the Hungarian Banking Association was presented to the Minister of Agriculture István Nagy, who thanked the Hungarian banking sector for its work in supporting and contributing to the success of the agricultural sector.
Cover photo: Portfolio
