Strong-forint policy has become more accentuated
The authorities’ desire to reduce inflation before the election has become more evident than at any time previously. The government cabinet has decided to extend the existing caps on retail margins, and the Economy Minister has hinted at a postponement of an excise tax increase originally planned for January. The Governor of the MNB delivered a rather hawkish speech at a conference in early September, and on the very same occasion, the Economy Minister assured the public of his support of the MNB’s tight policy line.
The key to genuinely reduce inflationary pressure, rather than suppressing the increase of the CPI by administrative methods temporarily, is to keep the forint strong. This is now a stated objective of the MNB. It is all the more important under the current circumstances, as the government’s economic policies are at least contradictory, some of them being outright inflationary. The latter are essentially the ones we mention by the collective name of "fiscal campaign gifts", such as the massive tax preferences granted to families, cash handouts to pensioners and members of armed services, another big hike in the statutory minimum wage, and the newly started program of cheap mortgage loans.
Even though the Economy Minister has made a strong commitment to the rating agencies and the general public to keep the fiscal deficit on a marginally decreasing trend even in the election period, policies to achieve that are bound to be highly asymmetric. On one hand, they will be aimed at boosting consumer demand, necessarily putting upward pressure on prices in that area, while on the other hand, offsetting measures may be expected to reduce spending in other areas, especially government services, the price impact of which will not affect CPI-inflation.
In sum, the authorities may be expected to go for a really strong forint in the coming months as the most efficient suppressor of domestic inflation. In view of that, and more specifically in the light of recent MNB communication, no base rate cut is likely for the rest of this year, despite earlier expectations. The Bank will also likely take into account the high level of risks and uncertainty of the current external environment, a topic it has repeatedly brought up recently. We would specifically mention here the substantial risk around the sustainability of oil imports from Russia, which threatens a material increase in local fuel prices in case of a long-term or permanent breakdown. For now, shipments through the Druzhba pipeline have been restored, after a series of hits by Ukrainian drones, but the Kyiv government has not taken that facility off its list of what it sees as a legitimate target.
In foreign relations, PM Orbán continues his usual balancing between west and east, causing lots of trouble for the EU but eventually cooperating on some important issues, such as anti-Russian sanction votes, defense issues and NATO activities. A new development in the latter regard is Hungary’s request for a massive loan from the EU under the latter’s new facility to enhance member countries’ defense capabilities.
The domestic political situation is somewhat reminiscent of the situation in 2022 when Fidesz won the election on the back of massive fiscal giveaways, an energetic propaganda campaign to exaggerate war threats, and overwhelming efforts to discredit the opposition in the media. Its current strategy seems to be quite similar, except that the war threat is replaced now by the threat of a poor and hostile Ukraine in the EU, and that now there is a stronger focus on maintaining fiscal and monetary stability than four years ago.
Anyway, this summer has brought about a modest narrowing of the gap between Tisza and Fidesz in all opinion polls, with both parties gaining additional support, but Fidesz gaining more. Our somewhat simplified explanation is that the delivery of Fidesz’s campaign promises has begun, convincing some uncertain sympathizers of the governing party to return to their natural supporting vote. Tisza still leads the polls significantly, and it is trying hard in its campaign, but Fidesz has an obvious dominant position in the media, and the bulk of its campaign gifts are still to arrive.
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