OECD: “Moderate recovery” for Hungary to continue into 2015

Further, “[Private investment] will nonetheless continue to be hampered by an uncertain business environment related to controversial domestic policies and tight credit conditions, which have been alleviated only partly by the central bank’s Funding for Growth scheme and by its low policy rate.”

The OECD projected Hungary’s economy would grow by 2.0% in 2014, unchanged from the forecast published last November; at that time, GDP growth was put at 1.6% for 2015.

The OECD expects Hungary’s unemployment rate to reach 8.7% in 2014, then edge up to 8.9% in 2015; the government deficit for both years was predicted to be 2.9% of GDP; and annual inflation was forecast at 0.5% in ’14 and 2.8% in ’15.

The report warned, however, that National Bank of Hungary (MNB) policy makers would have to balance the benefits of further base rate cuts against the “more acute risk of an abrupt depreciation of the forint … Restoring credit growth on a more permanent basis will require a better operating environment for banks and further cleaning up of their balance sheets.”

The MNB is thought to be nearing the end of an easing cycle started in August 2012. Rate-setters have slowed the pace of cuts recently, but a statement by the central bank’s rate-setting Monetary Council late in April did not appear to point unequivocally to an end to looser monetary policy.

The OECD stressed Hungary’s vulnerability to turbulence in global financial markets and said a further depreciation of the forint would make more difficult the servicing and rolling over public and private debt, much of which is denominated in foreign currency or foreign held. Events in Ukraine might also weakened growth, the report surmised.

“On the upside, a better operating environment for private firms, notably banks, would spur investment and growth,” OECD opined.