EU matters, fiscal policy and tomorrow's Monetary Council

HUNGARY - In Brief 29 Jan 2024 by Istvan Racz

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The forint, which had been getting progressively weaker since Mr. Virág spoke about the possibility of faster and deeper base rate cuts on January 17, was pushed further in a negative direction on Friday, by Finance Minister Varga's saying that they will aim at reducing the fiscal deficit below 3% of GDP over the next two years, rather than already in 2024, as targeted until now. Then this morning, it has been pushed further in the same direction by an FT article about a document leaked from the EU Council staff, according to which the EU could refreeze the whole amount of Hungary's development funds from the EU, with the express aim of causing harm to the Hungarian economy, if PM Orbán sticks to its veto on the EU's intended €50bn aid package to Ukraine at the upcoming extraordinary summit on February 1. Mainly, we are not sure that in the current situation - EURHUF is currently at 389-390 and it seems to have further negative potential - the MNB will be in the position to raise the monthly speed of rate cutting to 100bps from the recent practice of 75bps reductions. Back to the basic story, there is absolutely no surprise in the upward revision of the fiscal deficit target or the EU Council's likely reaction to Mr. Orbán's continued blocking attempts. The Reader may recall that we wrote about these prospects in last week's quarterly forecast report. However, there has some media noise in recent days, suggesting that the Hungarian government may be prepared now to withdraw its veto threat and go with the rest of member states. These indications appear to be true, as confirmed by Hungary's EU Minister János Bóka in the said FT article, but the government appears to ins...