Hungarian economic growth likely to accelerate firmly in 2017, NBH may further moderate key rate

Hungary’s economy decelerated last year significantly because of the lower use of EU funds money and lack of investment. Meanwhile, domestic consumption mainly helped drive the economic growth. It is also expected to help stimulate the Hungarian economy in 2017, noted KBC Market Research in a research report. The Hungarian household consumption is underpinned by huge wage rise and certain government measures such as VAT moderation and social contribution fee. Meanwhile, the new EU funds inflows and corporate income tax cut in 2017 might underpin investment.

“We expect above 3.5 percent Y/Y growth for 2017 up from around 2 percent Y/Y growth in 2016”, said KBC Market Research.

Meanwhile, the Hungarian central bank, the National Bank of Hungary, has maintained the base rate at 0.9 percent; however, the central bank continued to use the unconventional tools. At the end of last year, the cap of three-month deposit at HUF 900 billion was introduced, while the ON lending rate was moderated to 0.9 percent.

Even if a rate cut is unlikely in the months ahead, the National Bank of Hungary might moderate further the maximum amount can be placed in three-month deposit in the first quarter of 2017. This signifies that the effective benchmark interest rate might be moderated further that is already at around 0.5 percent.

“The NBH actions may keep the short-end of the curve at the current low level, while we see some risk on the upside on the long-end of the curve at the beginning of 2017, so we expect some modest steepening”, added KBC Market Research.

The EUR/HUF pair moved suddenly to 315 from 304, partially parallel with Polish zloty move; however, it was impacted also by the extra HUF liquidity pumped into the market by the central bank. Even if fundamentally there is some pressure on real appreciation of the currency, the central bank might attempt to keep the exchange rate in the range of 307 and 315 in the months ahead.

Inflation in the nation is likely to accelerate to about 2 percent year-on-year, which is higher than in the euro area. This also signifies some real appreciation of the currency if it stays nominally unchanged around the current level, according to KBC Market Research.