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Battle Against Inflation to go on, With no Immediate end in Sight

Analysis

With inflation soaring across Europe, Hungary is proving no exception. In fact, the 13.7% consumer price index measured in July is way above the 9.8% European Union average, though still nowhere near the 80% inflation in Turkey or the official 22% in war-ravaged Ukraine.

Hungary’s inflation, which accelerated at its fastest in 24 years, had left no other choice for the central bank than to raise interest rates by the most in the European Union. At its latest rate-setting meeting, the Monetary Council of the National Bank of Hungary (MNB) hiked the base rate by 100 basis points to 11.75%.

Currently, the base rate is higher than it was during the 2008 financial crisis, when it peaked at 11.5%, after an extraordinary rate hike between October 22 and November 25, 2008.

The decision was in line with expectations. “The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle,” the council reiterated in a statement released after the meeting.

“Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects,” the statement added. The council reiterated that the tightening cycle would continue “until the outlook for inflation stabilizes around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy.”

Draining Liquidity

The MNB said it would continue its cycle of interest rate hikes with inflation risks on the rise. To enhance monetary transmission further, the Monetary Council also introduced three measures to help drain interbank liquidity. The bank will raise the required reserve ratio set for the banking system as part of these measures.

The MNB was the first European Union central bank to start raising interest rates in June 2021 and has lifted its base rate by more than 1,000 basis points since then.

But inflation, running at 13.7% year-on-year in July, has outpaced the bank’s forecasts. Deputy governor Barnabás Virág said earlier in August that the bank must use all tools to fight inflation. He said it could peak later and at a higher level, around 18-19%, than previously expected, and will likely start declining only from next year and at a slow pace. Hungarian core inflation surged to an annual 16.7% in July, the highest in 25 years.

In the meantime, the Hungarian economy is holding up surprisingly well, even if it’s only for the time being, and darker times surely lie ahead. The second quarter GDP data exceeded analysts’ expectations. The Hungarian economy expanded by 6.5% in Q2 compared to the same period of last year. From the previous quarter, the expansion was 1.1%, and for the first half of the year, the data came to 7.3% on a yearly basis. Although an apparent slowdown cannot be avoided in the second half of the year, the overall annual GDP growth might be between 5-6%.

Speedy Expansion

Hungary’s economy expanded at one of the fastest rates in the European Union in the second quarter, Minister of Finance Mihály Varga said in a Facebook post following the release of the data. He added that Hungary’s 6.5% GDP growth in Q2 was more than 50% above the EU average.

A graphic in the post shows Hungary’s Q2 GDP growth, adjusted for seasonal and calendar year effects, was the third-highest in the EU, after Slovenia and Portugal.

Hungary’s industrial production also performed relatively well in July. According to the KSH, the volume of the industrial output grew by 4% that month, year-on-year. Based on working-day adjusted data, production rose by 6.6%. According to seasonally and working-day adjusted data, industrial output was 1.1% higher than in June 2022.

The preliminary data of industrial production in July indicates more significant than expected growth and show a favorable picture for the state of the economy. However, according to analysts speaking to the national news agency MTI, the breakdown of supply chains and the rise of energy prices overshadow the short-term outlook.

Sky-rocketing Prices

On a year-on-year basis, price rises of 27% were recorded for food in July. Margarine (by 65.8%), bread (by 57.9), cheese (by 52.6%), pasta products (by 49.1%), milk products (by 43.8%), poultry meat (by 38.8%), rolls (by 38.5%) and eggs (by 37.5%) all became markedly more expensive. The price of seasonal food products (potatoes, fresh vegetables, and fruits) went up at a below-average rate, by 13%. Chocolate and cocoa cost 12.7% more, sugar rose 8.4% and edible oil 6.9%. Consumers paid 14% more for consumer durables, including 20.1% more for kitchen and other furniture, 18.2% more for living and dining room furniture, 17.9% more for second-hand passenger cars, and 17.5% more for new passenger cars. Alcoholic beverages and tobacco prices rose by 11.2% on average, with alcohol up by 13.2%. Pet food became 33.1% dearer, household repair and maintenance goods’ prices were up 26.5%, toiletries rose by 16.9%, and motor fuel was 6.7% higher. Service charges were up by 6.8%, within which taxi costs were 27.4% more, household repair and maintenance rose by 20.7%, the repair and maintenance of vehicles jumped 16.4%, and recreational services became 13.1% more expensive.

Numbers to Watch in the Coming Weeks

July construction sector data will be published on September 15. The KSH will release its report on the state of the Hungarian labor market on September 22. The next rate-setting meeting of the Monetary Council is scheduled for September 27.

This article was first published in the Budapest Business Journal print issue of September 9, 2022.

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