Inflation jumped in January
CPI-inflation started the year with a big upward adjustment in January, on a cyclical pickup of agricultural prices, the decent strength of consumer demand and the impact of the weak forint on import prices. The size of this change genuinely surprised the MNB and analysts, even though its direction was widely expected.
Following the January inflation data, the task of central bank policy will be to contain the rise of inflation rather than to manage its downward movement back into the MNB’s target range by H2 2025. This prospect may have removed chances for even small base rate cuts for the rest of this year. Somewhat curiously, the reduced uncertainty regarding the future path of interest rates has worked as a forint-strengthening factor so far, causing some tightening of monetary conditions in recent days, without any measures taken by the MNB.
European gas prices have shown a great deal of volatility early this year, but the trend remains a distinct rise, and the level is twice as much as one year ago. Widespread claims that this is due to unusually cold weather appear to be largely false. The European gas market was mainly hit by Ukraine's halting the transit of Russian gas, in our view. However, a considerable amount of adjustment has taken place already, as Hungary is now receiving gas from the west as well, and its previous gas exports to Ukraine have also been restored.
Q4 GDP data was in line with official and market expectation, as the economy has narrowly climbed out of its short-lived technical recession. However, industrial output continued to shrink, and retail sales also disappointed in December, the latter after the excellent November data, whereas construction seemed to be stabilizing, and inward tourism had robust results.
The central government’s cash budget did reasonably well in January, but the debt ratio indeed rose moderately in 2024, especially in net terms. As a novelty, we present a detailed table on the central government’s cash budget plan for this year. The latter appears to be largely realistic, although we continue to have doubts about the feasibility of some revenue targets as regards the VAT, the corporate income tax and, especially, transfers expected from the EU.
Annual balance of payments figures for 2024 were reported pretty much in line with the forecast we gave a month ago. In essence, all of the current account, net financing and the basic balance ended up in surpluses moderately larger than one year earlier. The overall balance was roughly zero, but FX reserves grew faster than GDP and much faster than imports, because of exchange rate effects.
Regarding politics, PM Orbán’s recent talk has been focusing on foreign policy, which is his usual favorite anyway. Just one week before the upcoming German election, he invited to Budapest the co-president of AfD, a party from the extreme right, which is held in political quarantine in its home country. On this, and also on the issue of prospective peace talks about the war in Ukraine, Mr. Orbán is strictly following the line represented by the Trump government, which also means that he is now diametrically opposed to the views held by the European mainstream.
This, and an ongoing legal action against the head of a domestic anti-corruption institution, created under pressure from the EU, do not promise anything good regarding the prospective availability of EU funds. However, it remains unclear if the EU will indeed seek to move ahead with the existing Article 7 procedure against Hungary, towards a possible suspension of the government’s voting right in the European Council.
Domestically, opinion poll results have not changed significantly so far this year. Tisza, which has moved a great deal towards building out its party organization, in addition to having presented a detailed policy platform recently, remains narrowly in the lead. This essentially means a tie between it and Fidesz, given all existing circumstances, and that provides no clue at all on who may end up as the winner of next year’s parliamentary election.
Now read on...
Register to sample a report