Fight against inflation not over, Hungarian cenbank awaits banks for new consultation - Varga

The main messages of Mihály Varga's presentation were:

• The global economy is operating amid considerable uncertainty. Tariff tensions in Europe could result in slower growth and lower inflation.
• External risks are also impacting the Hungarian economy. Although domestic inflation has started to fall, the price index remains outside the central bank's tolerance band (3%+/-1ppt).
• The banking system is stable and resilient to shocks. It is able to lend to the economy at higher rates and with greater dynamism in terms of both capital and liquidity.
• As a persistent laggard in the region, a substantial increase in corporate lending activity is essential. Banks must make competitive investment loans available to SMEs.
• High cash costs should be reduced further. While the agreements between the government, the MNB and the Banking Association have set the direction in this respect, there is still room for further reductions.
• The MNB is ready to continue cooperating with the banking system to boost corporate lending and enhance consumer protection, all the while maintaining sector stability.

Three questions, but what's the answer?

According to Mihály Varga, there are three issues that will shape the world economy in 2025:

1. The outcome of the tariff war – Will it be two steps forward and one step back? The US has decided to substantially raise tariffs, and negotiations are underway to reduce them; however, there is huge uncertainty. US long yields have risen, which will also affect interest rates in Hungary.
2. US budget – Global Challenges: 'How is the world adapting to the soaring US yield?," he asked. The budget deficit could remain at its current high level for an extended period.
3. New winds in Europe: how and how quickly will the impact of overspending on GDP materialise? The key question is what impact European fiscal reform could have on the economy, as states attempt to stimulate growth in response to geopolitical uncertainty. Although the response is slow, the fiscal stimulus could have a positive impact on Hungarian GDP.

He pointed out that the world economy could face the problem of slower growth and stubborn inflation.

IMF forecasts predict lower and lower GDP growth, yet inflation is not expected to fall.

Domestic macroeconomic snapshot

Varga said that the external environment poses risks for Hungary in the form of lower growth and more moderate inflation. He added that rising tariffs would obviously curb exports and that increased uncertainty could lead to lower consumption and postponed investment. However, the fall in energy prices is a positive development. The external position and primary balance of the Hungarian economy have improved significantly, and this must be maintained, he said.

Our GDP growth has been subdued for years, despite a strong labour market and historically high employment. This is one of the most stable segments of the economy, with 4.7 million people in employment. However, labour market tightness is easing, with five unemployed people for every job vacancy.

The fight against inflation is not over yet. While the measures taken in recent months may have an impact in the short term, achieving the long-term target requires stabilising both business and household expectations, which in turn requires anchoring inflation expectations.

The profitability and lending capacity of the Hungarian banking system is outstanding

The banking system is stable and it remains highly resilient to shocks, the Governor underlined. The banking system's after-profits in 2024 exceeded even the oustanding figures of 2023, and the banks' performance was extraordinary:

• the return on equity was 22.6%.
• the balance sheets were healthy, with the non-performing loan ratio for retail loans below 3%.
• the liquidity coverage ratio was 170% (well above the target of 100%).
• the capital adequacy ratio stood at 20.5% at the end of 2024.

Even when adjusted, the historically high profitability is significantly supported by one-off and transitory items. While banks are planning to pay a substantial dividend (close to HUF 800 billion), a key priority remains to further increase reserves, supported by the capital buffers imposed by the central bank. The key point regarding the credit market is that

the banking system's lending capacity remains robust, with no supply-side constraints on lending.

With the loan-to-deposit ratio of the domestic banking system lower than the regional average (at around 70%), there is ample room for lending to expand, particularly in the corporate sector and the retail sector. Domestic household credit has been growing at a rate above the regional average for over a year, with dynamic growth of 11% in the last year alone.

For the whole of 2025, the MNB expects household credit to grow by 12%.

Recovery in the retail lending sector continued in early 2025, with total household lending increasing by 66% last year and by 45% in the first quarter of this year. Although home loan rates have stagnated since the second quarter of 2024, demand remains strong. According to MNB data, HUF 77 billion worth of new loans to workers (in the government's new Workers' Credit Programme) had been signed by the end of April.

Challenges for the banking system

In much of the EU, corporate credit dynamics are already picking up, with Hungary experiencing low annual growth of around 2%. Despite the banking system's potential to increase lending activity, corporate lending is currently subdued.

Businesses cite low demand for their products and services as the main constraint on growth. This is also one of the reasons why Hungary has yet to experience a turnaround in investment credit demand.

However, companies' liquidity situation is particularly good, which works against higher demand for credit. According to the MNB's lending survey, domestic banks do not expect a turnaround in demand for investment loans in the coming quarters.

the extremely high cost of cash flow for households and businesses must be curbed,

said Mihály Varga. The main objective of the MNB is to ensure that the commitments resulting from the agreement with the banks are implemented as soon as possible.

Following the April consultation with the retail sector, the central bank will hold another consultation with banks in June, this time focusing on increasing lending to corporations.

Cover photo: Portfolio