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MNB sees CPI dropping to target from mid-2019

Inflation will remain slightly over 3% in the short term, but underlying developments will ensure the achievement of the inflation target in a sustainable structure from mid-2019, the National Bank of Hungary (MNB) said in a quarterly report released Thursday, summarized by Hungarian news agency MTI.

The MNBʼs mid-term inflation target is 3% in a +/-1 percentage-point tolerance band.

Speaking at a press conference presenting the report, András Balatoni, the central bankʼs head analyst, said inflation will slightly decelerate in the coming months, mainly on the base effect from vehicle fuel prices, but will still remain slightly above 3%.

Twelve-month CPI has exceeded 3% since June this year, and rose further to 3.4% in July and August.

The current account balance will continue to show a surplus and the external financing capacity (see heading below) will also stay at a high level, Balatoni added.

The MNB has left its inflation and economic growth forecasts for this year and next year unchanged. It projects CPI of 2.8% and GDP growth of 4.4% in 2018, and CPI of 3.1% and growth of 3.5% in 2019. For 2020, the MNB projects CPI of 3% and GDP growth of 3%.

The central bankʼs freshly announced Funding for Growth Scheme (FGS fix) and German car maker BMWʼs EUR 1 billion investment, announced at the end of July, will help sustain corporate investment growth through to 2020, strengthening both competitiveness and long-term growth, says the MNB.

Household spending to rise; export growth steady

According to the MNB report, household consumer expenditure should rise by 4.9% this year, by 3.2% in 2019, and by 3.1% in 2020. These numbers are almost completely unchanged from the central bankʼs earlier Inflation Report in June.

Exports are expected to grow by 6.9% this year, below the 7.5% growth forecast earlier. Export growth should pick up to 7.2% in 2019, then fall to 6.5% in 2020, the MNB says. Imports, meanwhile, should increase by 9.2% this year, by 7.9% next year, and by 5.7% the year after, it adds.

The current account balance is forecast to vary between 1.3% and 0.7% of GDP during the forecast horizon, while external net lending will fluctuate between 2.9% and 3.3% of GDP, contributing to the further reduction of the external vulnerability of the economy.

The net lending of the economy will decline to 3% of GDP in 2018, followed by stabilization around this level, the MNB adds.

The unemployment rate should gradually fall from 3.5% in 2018 to 3.3% in 2020, says the central bank. Household real income is estimated to continue growing, although at a slower pace, expanding by 6.0% this year, but only by 2.5% in 2020.

Fiscal developments

According to the MNBʼs forecast, the government sectorʼs deficit will be around 2.2-2.3% of GDP in 2018, while the accrual-based deficit will be 1.7-1.8% in 2019, and 1.4-1.8% in 2020.

Due to tax cuts and the impact of one-off revenues in previous years wearing off, the ESA deficit is increasing slightly this year relative to 2017, the MNB notes. In 2019, the budget deficit will decline again, supported by rising tax revenues resulting from favorable macroeconomic developments, it adds.

The MNB predicts revenues from taxes on labor may substantially exceed expectations, coming in at 0.3% of GDP higher than thought, while revenues from VAT and the financial transaction tax may also be above target, by 0.2%.

On the expenditure side, the central bankʼs prognosis for expenditures of budgetary organizations is above the appropriation, partly offset by the fact that lower accrual-based expenses are expected in the case of co-financing of EU funds, due to the lower-than-expected amount of invoice payments and advance utilization.  

Calculating with extra measures, such as winter-related utility cost reductions, advance wage rises in healthcare and pension supplements, government expenditures could be 0.6% of GDP higher than thought, but could be further balanced by the cancellation of the country protection fund and methodological changes.

According to preliminary data, gross government debt, including the debt of Eximbank, was 74.5% of GDP at the end of the second quarter of 2018.  Assuming a constant end-of-2017 forint exchange rate, the MNB says the gross debt-to-GDP ratio will decline to 72.4% by the end of 2018, thereby satisfying the debt rule set down in the Fundamental Law (constitution).  

The moderate budget deficit and the dynamic expansion of the economy point towards a marked decline in government debt over the forecast horizon, mitigated by advances of EU funds and the absence of EU payment revenues in 2018, the MNB notes.

Net external financing capacity drops

Hungaryʼs net external financing capacity - the combined surpluses of the current and capital accounts - reached EUR 1.192 bln in the second quarter of 2018, the MNB also reported in a first reading Thursday.

Excluding seasonal factors, net external financing capacity dropped to EUR 826 million, or to 2.5% of quarterly GDP, the lowest ratio measured since Q1 2011. 

Within net lending, the current account surplus, at EUR 772 mln, or a seasonally adjusted EUR 588 mln, dropped to 1.8% of quarterly GDP, the lowest since Q4 2014. 

The external financing capacity dropped by EUR 775 mln, or by an adjusted EUR 844 mln, from the high base in the previous quarter as EU transfers dropped sharply from the three-year peaks they reached in Q1, the central bank adds. The capital account surplus fell by two-thirds to EUR 420 mln as a result, and current EU transfers almost halved to EUR 260 mln, explaining the bulk of the quarter-on-quarter drop, the MNB notes.