Insight from the National Bank of Hungary: It’s time to think big | Instantaneous

The reason for our call

The better than expected GDP growth in the second quarter reinforces our view that this year’s performance will be good. Our revised outlook calls for GDP growth of 5.2% in 2022, reflecting strong first and second quarters but weak third and fourth quarters. We see a technical recession coming, caused by an ongoing cost of living crisis. Consequently, we have lowered our outlook for 2023 to 1.0-1.5% with additional downside risks.

Our view on the cost of living crisis is based on our updated inflation forecasts. Changes to fuel price cap regulations will add about 1 ppt to August inflation, while the amended utility bill support program and significantly higher public parking prices could increase inflation. CPI of an additional 1 to 1.5 ppt from September. Whether the peak comes in October or later depends on the fuel price cap, as it expires on October 1 if the government does not change the decree.

We expect the fuel price cap to be phased out, so the peak could come in December at 22% YoY. All in all, regulatory changes, the upward inflation surprise in July and rising commodity prices lead us to call for headline inflation of 14% in 2022, followed by an average CPI of 15.3% in 2023. For now, we expect price changes to decline. to a range of only 3 to 4% in the first half of 2024.

At first glance, this screams for more tightening. But in our opinion, the terminal rate could be more a function of the behavior of the forint than of the peak of the CPI. Moreover, despite an already double-digit interest rate environment, the National Bank of Hungary (NBH) was unable to protect the forint from the shocks of a crisis of confidence. A crisis that lies in the debate on the rule of law and the negative impact of the energy crisis on economic prospects and the external balance.

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