The rationale behind our call
The National Bank of Hungary made clear on several occasions that the temporary and targeted measures (introduced in mid-October) will remain with us until there is a material and permanent improvement in the general risk sentiment. This general risk sentiment is defined by a combination of external risks (war, global monetary policy, energy, general investor sentiment) and internal risks (Rule-of-Law procedure, current account imbalance).
If we take a quick overview of all the above-mentioned criteria, we get the general impression that there has been progress in several areas. The market is now generously looking through the final stages of major central bank tightening, and the focus is on the next big thing: the easing cycle. At the same time, risk-taking has started to build again, helping emerging market assets, including the forint. A large part of the relief rally is also coming from the recent drop in energy prices which has not only improved general investor sentiment but has also removed some uncertainty from energy-dependent countries like Hungary.
However, these improvements are not necessarily translating into better hard data, yet. The current account might improve going forward, thanks to retreating energy prices but hard evidence for such a change in the balance has been scant. The Rule-of-Law debate is out of the limelight now, but the government is still facing a long road to clear every hurdle before all possible EU funds are made fully available. The 2023 budget, however, shows clear optimism from the government’s side as the revenue side consists of roughly EUR 5.6bn (2.9% of GDP) of transfers from the EU.
On the macro front, economic activity looks to be more resilient than we thought earlier which might be a bit of a mixed blessing; a tighter-than-expected labour market and accelerating wage growth might raise questions about a wage-price spiral in Hungary. The latest developments in the labour market along with a better outlook for external demand (especially the Chinese growth story) lead us to revise our GDP outlook. We now expect 0.7% GDP growth in 2023, followed by 3.6% growth next year. Against this backdrop, we think the time is not right for any dovish pivot by the National Bank of Hungary.
On the inflation front, the lower-than-expected December headline reading leads us to shift the trajectory of projected inflation lower, but this is still nowhere near a normal environment. We see an average inflation rate of 18.5% in 2023 with a peak of 25.2% being reached in January-February. Another factor behind our downward revision comes from anecdotal evidence that service providers and retailers see no further room (after the January repricing) to pass costs onto consumers as consumption is plummeting. We see upside risks, however, given the tight labour market, with strong wage growth further strengthening wage-push inflation. In our view, this could be a red flag when it comes to any change in monetary conditions.
