Domestic consumption to drive Hungarian economic growth in 2017, economy likely to grow above 3.5 pct

Last year, Hungary’s economy decelerated significantly, owing to lower use of EU funds month and subdued investment. Domestic consumption mainly drove the Hungarian economy that might still stimulate the economy in 2017, noted KBC Market Research in a research report. The household consumption is underpinned by huge wage increase and some government measures such as social contribution fee, moderation.

Meanwhile, investment might be underpinned by the new inflows of EU funds and corporate income tax cut this year. According to KBC Market Research, the Hungarian economy is likely to expand above 3.5 percent year-on-year this year, as compared with the 2 percent growth seen for the whole of last year.

Meanwhile, the Hungarian central bank maintained its key interest rate on hold at 0.9 percent during its last meeting. The National Bank of Hungary introduced the cap of 3-month deposit at HUF 900 billion at the end of 2016, whereas the ON lending rate was lowered to 0.9 percent. Even if the central bank is unlikely to lower the base rate in the months ahead, it might moderate further the maximum amount that can be placed in 3-month deposit in the first quarter of 2017. This suggests that the effective benchmark rate might be lowered further, added KBC Market Research.

In the meantime, there is some pressure seen on real appreciation of the Hungarian forint. But the central bank might attempt to maintain the exchange rate in the range of 307 and 315 in the months ahead. Meanwhile, the inflation is likely to accelerate to about 2 percent year-on-year, which is higher than in the euro area. This suggests some real appreciation of the currency if it stays nominally unchanged around the current level, stated KBC Market Research.