Hungary sees no risk of overheating, says report

In the report, Morgan Stanley said that as growth was 4% in 2017, the budget deficit likely ended the year around 2% of GDP and inflation remains contained, the authorities are looking at this as an implicit vindication of their policies, and "essentially plan to do more of the same."

Wage increases are seen as essential to keep Hungarians from going abroad, and to encourage more to join the labor market, the report observes. Given the low wage share and the large gap with the EU, wage hikes are not seen as detrimental to Hungaryʼs competitiveness in the eyes of the authorities; on the contrary,  the report adds, they are an important part of Hungaryʼs economic success.

While Morgan Stanley says that "it is perhaps not surprising" to see the government endorsing a policy of rising incomes in the run-up to an election, it notes that it is less common to see a central bank "embracing the notion of above-potential growth so wholeheartedly."

The National Bank of Hungary (MNB) not only believes that the economy is not overheating, but it also thinks that "running the economy hot" is itself conducive for lifting potential growth by boosting consumer confidence, observes the report.

Within this framework, and against the backdrop of a strong external surplus that gives the forint a natural tendency to appreciate, the central bank has every incentive to keep policy rates - effectively BUBOR, near zero - on hold for as long as possible, observes Morgan Stanley. Moreover, the bankʼs policy "seems to us to be designed to lag its peers (the ECB and other CEE central banks), thereby making the Hungarian policy stance looser in relative terms."