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The momentum of Hungarian economic growth is likely to slow in 2016, following a strong expansion of 3 percent last year. The Hungarian economy will be impacted by the waning of the regional auto industry boom, pausing of EU fund inflow in 2016 before picking up again in 2017 and the risk to the German economy from developments in China. In the past quarter, the PMI has already dropped towards 50, while the latest manufacturing data has also affirmed a loss of momentum.
The Hungarian economy is unlikely to have any tangible impacts from Brexit until two years; however, a downturn in general investment is expected in the near-term due to uncertainty about the CEE nations’ outlook that rely very much on developed EU demand, noted Commerzbank in a research report.
“We forecast slower 2.2 percent GDP growth during 2016,” added Commerzbank.
Meanwhile, inflation in Hungary is expected to accelerate from the current negative to higher than 1 percent by late 2016 because of the base effect from utility price cuts. However, the outlook of inflation is quite benign as compared to recent years.
Moreover, the Hungarian central bank has cut its 2016 inflation forecasts to 0.5 percent from the earlier projection of 1.7 percent. It also lowered core inflation outlook to 1.5 percent from 2.4 percent. There continues to be downside risk to 2017 forecasts, said Commerzbank. But the central bank projects core inflation to quicken to 2.9 percent next year.
The Hungarian central bank has lowered its key interest rate to 0.9 percent in 2016 and has hinted that the easing cycle is finished for now. The MPC of the central bank has kept flexible wording about this guidance. And even if the MNB is unlikely to lower further lower rates this year, it is expected to cut rates in 2017, possibly to 0.5 percent, according to Commerzbank.
This is due to persistent low inflation in the euro area that is expected to urge the ECB to lower rates too, and developments such as Brexit that have pushed market interest rates of euro zone lower. The central bank is also likely to keep its QE program by renewing its cheap lending schemes for SMEs.
The end of easing cycle is expected to result in a stable forint in the coming quarters. However, the currency is likely to face slight upward pressure from Brexit related uncertainties. The EUR/HUF is likely to trade at 322 by the end of 2016, stated Commerzbank.
Persistent low inflation is expected to renew rate cut expectations in the coming year. Such a development, combined with an expected deceleration of the GDP growth in 2016, is expected to exert upward pressure on the EUR/HUF pair by the end of 2016.
