Conflict between the government and the MNB carries negative potential for the forint
The key story this month is the ongoing conflict between the government and the MNB, which has gotten sharper recently in the wake of a Finance Ministry proposal to amend the Central Bank Act. This amendment would be about the control of the Bank’s long-existing wealth trust, which is a non-policy issue, but Governor Matolcsy claims that the proposal is just another attempt to undermine central bank independence. In our report, we offer some thoughts about the possible reasons and consequences. In essence, this conflict is likely to persist between now and March 2025, when Mr. Matolcsy’s term as governor is set to end, and it will probably imply a higher MNB base rate and yet a weaker forint than would be required if proper cooperation existed between the government and the MNB.
Energy import prices remain largely favorable, except for Russian crude oil, the price of which has been rising faster than Brent/WTI lately. The BOP still looks all right from the energy point of view, but the impact on retail fuel prices may be material, making a negative contribution to this year’s prospects for further disinflation. Supply security has improved due to the availability of abundant gas reserves and diversification away from Russian crude oil. The gas situation has been improved by exceptionally warm weather in February and above-average sunshine early this year in Europe, but especially in Hungary.
The growth picture still looks pretty bleak. As it turned out, GDP growth in 2023 would have been significantly more negative without the one-time impact of agriculture’s normalization after the production debacle of 2022. The first data regarding 2024 was somewhat mixed but mainly negative: industry continued its contracting trend, and credit expansion decelerated further. After some pickup in the previous two months, retail sales growth came to a halt in January. Even so, retail sales growth has become marginally positive again in year-on-year terms, and real wage growth has become substantially positive. Regarding consumer demand, data may become more positive from February, when many wage earners get their annual wage adjustments for 2024 for the first time.
The central government’s cash deficit shot up in February, partly on seasonal grounds, but it was a little smaller in ratio terms in the first two months together than in any of the previous two years. Debt costs more than doubled from 2023, as annual interest payments on HUF-denominated, inflation-indexed retail bonds come due predominantly in Q1. This also means that the primary deficit fell substantially. The estimated actual deficit ratio for 2023 was once again "rounded up" a bit, and a softer medium-term target path for fiscal adjustment was confirmed recently. The general government deficit would be reduced below 3% in three years, rather than this year as originally expected. Achieving the new target for 2024 would secure a marginal reduction of the gross debt ratio. What remains unclear, though, is how much extra restriction will be required to actually meet the deficit target.
CPI-inflation data for February once again surprised analysts positively. Given the similarly favorable January results, it seems that the early-year repricing season ended with good results, suggesting that inflation expectations have settled down by now. But even so, the predominant analyst expectation is that CPI-inflation will rise moderately over the rest of 2024. The reasons behind this prediction continue to include changing base effects, stabilizing producer and import prices, a weaker forint, strengthening retail sales and real wage growth, and a recent rise in crude oil prices.
Following an 18-month waiting period, parliament finally voted to approve Swedish NATO membership in late February, removing a key factor that complicated foreign relations with the EU/NATO community for a long time. Killing two birds with one stone, the government also reinforced its commitment to NATO by completing a major arms deal with Sweden. PM Orbán has placed a large bet on Mr. Trump’s reelection, which was demonstrated by a recent visit by him at the latter’s estate in Florida. The EU Commission has recently unblocked an additional €2bn of cohesion funds for Hungary. However, this was countered by a European Parliament decision to sue the EU Commission over the release of €10.2bn of cohesion policy grants in December.
The recent "pedophilia case", which led to the resignation of important political figures from Fidesz, has had an impact on public opinion, but opposition parties have been remarkably unable to make gains from it. The notorious fragmentation of the opposition has even intensified recently, making it hopeless to achieve any significant result against Fidesz in the upcoming European election. In the local government elections, to be held simultaneously in June, opposition parties have chances to win in Budapest, but even that would only mean that they could keep their existing positions.
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