The government is interfering with monetary policy once again
The often incalculable consequences of current US trade policy have proven to be quite easily calculable lately, even though probably for a short while only. Mr. Trump’s threat to impose penalty-level import tariffs on European goods has been averted, with the initially announced tariffs halved, and the likely impact reduced roughly to the level we predicted a month ago. Other key elements of the US-EU trade deal appear to be either neutral or expressly beneficial for Hungary. For sure, this is far from the end of the story, but under the current volatile circumstances, gaining time may mean gaining life, as well.
Similarly, the various US threats to impose sky-high import tariffs on those buying Russian energy appear to be off the agenda for now, as Mr. Trump has entered into direct talks with Russia’s president. Anyway, the energy market appears to have thoroughly discounted these threats, as shown by the recent sideways movement of crude oil and gas prices at a level advantageous for Hungary as an energy importer.
GDP growth consolidated a bit, returning to positive territory in Q2, just as analysts, including ourselves, widely predicted. Industry continued to shrink, although less rapidly than in Q1, and agriculture, hit by bad weather conditions once again, was also mentioned as a significant drag on growth. However, the robust trend of consumer demand, which normally supports the services sector, was upheld. Construction activity picked up on a recovery in the housing sector and on a sudden upturn in the government’s fixed investment spending.
The deterioration of the trade balance continues as a result of significant import growth, while industrial exports remain subdued. The key balances of the external accounts are slowly moving in a negative direction.
By end-July, the central government’s cumulative seven-month cash deficit fell back to the vicinity of the annual target. This was supported by above-plan revenues, mainly from taxes and from dividends received from publicly owned companies. With next year’s election approaching, the government has recently increased fixed investment spending, whereas its net spending on some other important lines is running significantly below plan or last year’s actuals. The second half of 2025 will be different, as the delivery of previously made election campaign promises is starting, whereas less spending will be required on interest payments. The government has announced new, election-related, spending measures, but they appear to be prudent enough to keep the fiscal cost of those relatively low.
CPI-inflation has decreased a bit further, mainly due to the recent strong course of the forint and also influenced by two powerful base effects in July. Indeed, core inflation has fallen back right to the top end of the MNB’s target range. However, this improvement took place on the back widespread administrative price controls, to which "voluntary" self-restraint by producers, wholesalers and retailers in the pharmaceutical sector was added in July.
The government’s aspiration to achieve more rapid growth and lower inflation at the same time, combined with its ambition to win the election, has led to the introduction of low-interest mortgage loans for first-time home buyers from September. Bank lending to the enterprise sector is also likely to strengthen, as pre- and supplementary financing will be required for an increasing supply of government-supported development projects. None of this requires any policy change from the MNB directly, but some of this represents a kind of government interference with monetary policy. Somewhat paradoxically, these measures are likely to ease the pressure on the MNB to reduce its interest rates, and to strengthen the Bank’s ability to keep the forint strong, with the help of the relatively high base rate and its impact on cross-border capital flows.
In recent weeks, PM Orbán has made his first critical comments of President Trump, speaking of his disappointment over the fact that the latter has not been strong enough to win European leaders over to the side of peace supporters, using his phraseology. This marks no change in his policy whatsoever, being most probably only the consequence of the fact that these days, Mr. Orbán is speaking publicly much more than he used to. Most recently, his government has made a series of critical remarks on the EU Commission’s new budget proposal for 2028-2034, for what it calls an attempt to concentrate more power in the Commission’s hands and for directing an unduly large part of EU funds towards helping Ukraine. On the first issue, the government has good chances to find allies within the EU, whereas on the second one, its chances to form a powerful opposition appear to be far smaller. The latter is mainly because the government is not only against Ukraine’s fast-track accession to the EU, but it also openly questions if Ukraine should become a member of the EU at all.
Indeed, Mr. Orbán has given a series of speeches and podcast interviews, normally speaking to a clearly supportive audience, over the last few months. He has not said too much new, focusing much more on his usual points regarding global politics and also on the promotion Fidesz’s various fiscal vote-getting measures. In addition to the previously launched "digital fight club", Fidesz has also started to form so-called "digital civic circles", with limited initial success in the latter’s organization. Apparently, this is being done on the conviction that the domestic political competition has greatly shifted into social media lately. According to Fidesz, its policies are essentially the correct ones, and winning the election will depend mainly on the correct way of communication.
Meanwhile, the head of Tisza has started another round of personal visits to a wide range of settlements around the country, with a view to winning over the local voting communities, eating into the core of Fidesz’s support base. Mr. Magyar keeps focusing on the basic matters of economic well-being and the quality of government services, making references to the repeated breakdowns of public transportation, health care, government administration, etc. Should a free and fair election be held now, Tisza could win, as polls suggest. But the implementation of Fidesz’s vote-getting measures can still change a lot, and worries about the possibility of an even election playing fields remain present.
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