The MNB’s tight policy course is vindicated—once again
In the past few weeks, this is the second time we are giving this title to a piece of research. The first occasion was when the May inflation data came out with an unexpected rise in the headline rate. But we are coming back to this same conclusion again, after all that has happened, and in view of what may still happen, between Israel, the US, Iran and the global energy market. In such cases of hardship and uncertainty, there is nothing more useful than a decent surplus on the external accounts and a sufficiently cautious central bank, which is unpressured by the government for an undue loosening of its policy course. The good news is that Hungary presently enjoys both of these supporting factors.
The recent events in the Middle East have substantially increased the uncertainty around oil and gas prices. So far, only a limited amount of harm has been done, but an increasingly likely negative scenario could push up the cost of energy imports substantially this year. And trouble never comes alone. Even before the eruption of the current Israel-Iran conflict, the EU Commission expressed confidence that EU members would not be hit by US secondary tariffs on those buying energy from Russia. This is positive for Hungary, but the EU’s medium-term plan to completely eliminate Russian energy has also been maintained, with all of its prospective negative consequences. A newly announced plan to lower the existing price cap on Russian crude oil will likely cause further complications as well, if still enforced under the most recent complicated international conditions.
Detailed Q1 GDP data has confirmed that negative growth was due to falling industry, construction and fixed investment, whereas services and purchased household consumption did all right. KSH’s April data showed a mixed picture, as it looked poor in a year-on-year comparison but quite strong regarding single-month changes. This maintained the realistic chance that the economy may move back to positive growth in Q2. However, retail sales, also quite robust in April, are growing more on the back of rising consumer confidence now than on support from wage growth. This trend may not be sustained for long, but the government’s income-boosting campaign gifts could still trigger a reasonable amount of consumption growth in 2026.
The balance of payments maintained its strong course in April, with surpluses on all important lines achieved in the first four months of 2025.
The fiscal deficit ratio has decreased further, due to robust tax revenue, contracting net interest payments, and a significant dividend payment received by the central government in May. After a negative debt rating decision from S&P in April, the government escaped similar moves by Moody’s and Fitch Ratings in their latest reviews. All three agencies said that avoiding further negative rating changes would require continued fiscal consolidation, with both deficit and debt ratios being reduced. The government unexpectedly scaled back the size of a previously announced election spending measure in recent weeks, reducing the distance between the likely outcome and their 2025-2026 deficit targets.
Recent developments on inflation have been moderately positive. The headline rate rose somewhat in May, mainly on seasonal food prices, but the deceleration since February was still substantial. Core inflation, and within that, the rise of the long-time critical services prices, slowed further. Even so, inflation is still significantly above the MNB’s target range, although with stable energy prices and HUF exchange rates, the ceiling of the range could well be reached by end-2025. However, the risk of materially higher energy prices has recently become substantial in the wake of the Israel-Iran military conflict. This could push headline inflation markedly higher over the rest of this year.
The MNB’s insistence on a tight course of interest rate policy has greatly contributed to the forint’s stability against the euro for the past four months. In addition, it was most probably an important factor in keeping Hungary’s credit rating stable during the most recent reviews. We do not think that the relatively high MNB base rate, in terms of it real positivity, represents a particularly tight limit for bank lending. Indeed some recovery has been recorded in that area over recent months. The MNB’s balance sheet shrank further in May, without any material monetary impact, because of the continued existence of ample excess reserves in the banking sector.
The government and Fidesz are not doing well, either in foreign relations or in the domestic political theater. Internationally, they are under pressure by the lack of support from the US government, and by the EU’s energy sector plans and heavily pro-Ukrainian policy line. Domestically, opinion polls showed a further shift in favor of the opposition Tisza in May.
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