Hungarian economy to decelerate in 2016, central bank likely to further lower policy rate

Hungary’s economy expanded strongly in 2015 by 3%; however, it is likely to slowdown in 2016, said Commerzbank in a research report. The German economy is facing risk from developments in China; the EU fund inflow will be halted in 2016 and be started again in 2017, and the boom in Hungary’s auto industry is also waning.

Hungary’s PMI has dropped sharply towards 50 in the past quarter, while the latest manufacturing print indicates slowdown. The Hungarian economic growth is expected to decelerate to 2.2% in 2016, added Commerzbank.

Headline inflation in Hungary is expected to speed up from current near-zero to an average of 1% in 2016, according to Commerzbank. However, the outlook of inflation is quite benign as compared to recent years. Moreover, the central bank has cut its 2016 headline inflation projection to 0.3% from 1.7%.

“The 2016 projections are now dovish enough, but downside risk exists for 2017 forecasts where MNB expects inflation to mean revert again, e.g. core inflation is forecast to accelerate to 2.4% for 2017, which we are sceptical of” noted Commerzbank.

The Hungarian central bank has begun the rate cutting cycle again after a halt. It reduced the policy rate to 1.05% in April and is likely to ease further. The benchmark rate is expected to be lowered to 0.75% before the end of 2016. Moreover, the central bank is likely to expand its QE program this year, added Commerzbank.