The building of the NBH in Budapest – Photo: wikimedia

Central bank sees faster disinflation from second half of 2023

Hungary's central bank has said it expects inflation to fall "moderately" in the coming months, then at a faster pace in the second half of the year.

Inflation peaked in January, with both external and internal factors pointing to disinflation, central bank director Andras Balatoni said on Thursday, presenting the National Bank of Hungary’s latest quarterly Inflation Report.

Disinflation is expected to accelerate in the second half of the year and return to the central bank tolerance band in 2024, he said.

Analysing the inflation processes of the first two months, Balatoni said the February data (25.4 percent year/year) were in line with expectations. The increase in food prices — and especially processed food prices — remains high both historically and by international comparison, but the pace of price increases fell for the second month in a row in February.

The central bank already published the key figures of the Report on Tuesday: it forecast annual average inflation between 15.0 percent and 19.5 percent in 2023, unchanged from the December projection. For 2024, the NBH raised its inflation forecast to 3.0-5.0 percent from its December projection of 2.3-4.5 percent.

Among the external factors of disinflation, Balatoni listed falling energy and commodity prices as well as transportation costs.

Declining household consumption has a “disciplining” effect on pricing behaviour, which will help accelerate the disinflation process in the second half of the year, according to the central bank’s analysis.

Companies’ inflation expectations have declined significantly in all sectors, especially in retail trade, Balatoni said.

On the outlook for the real economy, he said the Hungarian economy continued to contract in the first quarter — both on a quarterly and an annual basis, but the economy could pick up from the middle of the year thanks to positive fundamentals and the high level of employment. The NBH cut its economic growth forecast to between 0 percent and 1.5 percent in 2023 from its earlier projection of 0.5-1.5 percent. For 2024 and 2025, the forecast remains unchanged at 3.5-4.5 percent and 3.0-4.0 percent, respectively.

The central bank expects gross wages to grow at around 14 percent in the business sector, and the dynamic increase in company profits provides room for this, Balatoni said. Wage growth could slow to around 10 percent next year, he added.

According to the quarterly report of the NBH, the increase in consumer prices has exceeded nominal wage growth since September 2022, that is real wages have been declining for more than six months on an annual basis.

The central bank sees real wages falling by 0.6-1.4 percent as an annual average in 2023, projecting real wage growth of 2.1-3.3 percent next year.

Household consumption is expected to decline by 1.1-2.0 percent this year but increase by 2.1-3.1 percent in 2024.

Falling energy prices will help achieve the deficit targets but a tight budget is necessary to meet the targets, Balatoni said. According to the central bank’s data, the government’s ESA deficit target of 3.9 percent, which is 0.4 percentage points higher than the December target, will be achievable this year. The state debt as a percentage of GDP will be reduced to 65 percent by the end of 2025, he said.

The current account deficit reached its low last year at 8.1 percent of GDP due to the high energy prices. The central bank expects the current account deficit to halve from 2023 — parallel with the improving foreign trade balance — and the country’s external financing capacity to become positive from 2024.

Fielding a question, Balatoni said they do not expect the food price caps to be phased out. Phasing these out could add 1 percentage point to inflation, but a lot depends on the behaviour of retailers, he said.

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