Hungarian economic growth likely to accelerate higher in 2017, NBH to keep base rate on hold in months ahead

Hungary’s economic growth decelerated considerably last year because of the lower use of EU funds money and lack of investment. Domestic consumption mainly drove the economy. It is expected to continue boosting the economic growth this year, noted KBC Research in a research report. The household consumption is underpinned by huge wage rise and some government measures like moderation of VAT, social contribution fee, while investment might be underpinned by the new EU funds inflows and corporate income tax cut this year.

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

The Hungarian National Bank has maintained its base rate at 0.9 percent; however, it continued to use the unconventional tools. The cap of three-month deposit at HUF 900 billion was set up at the end of last year, while the ON lending rate was moderated to 0.9 percent.

“Although we don't expect any cut of base rate for the coming months, the NBH may moderate further the maximum amount can be placed in 3-month deposit in 1Q17, which means that the effective benchmark interest rate may be moderated further, which is already around 0.5 percent”, added KBC Research.

The central bank’s actions might keep the short-end of the curve at the current low level, while some risk on the upside is expected on the long-end of the curve at the start of this year. Thus, some modest steepening is likely.

Meanwhile, the NBH might attempt to keep the exchange rate in the range of 307 and 315 in the months ahead. The inflation is likely to accelerate to about 2 percent year-on-year, which is higher than in the euro area. This also signifies certain real appreciation of the currency if it remains nominally unchanged around the current level, stated KBC Research.