Hungary’s economic rebound should be much slower than earlier anticipated in 2024 and GDP is set to expand 2.0% after a 0.9% contraction in 2023, Erste Bank said in a note. Officially, the government’s target is 4.0%, but on Tuesday Economic Minister Marton Nagy said that reaching this target is no longer realistic.  

Economic rebound stalled at the end of the year as GDP stagnated in Q4 on a quarterly and annual level, due to the weak performance of industry and still subdued domestic demand.

On the back of real wage growth, lower inflation and continued monetary easing, the contribution of domestic factors is set to be stronger this year, but the weakness of the external environment remains a relevant risk, hampering the prospects of industrial exports.

Rapid disinflation is set to lose steam in the spring, with the base effect fading. The improvement in consumer demand and fiscal consolidation should create additional inflation risks later in the year, Erste said.

Annual average inflation could drop to 4.7% in 2024 and reach the central bank’s 4% tolerance band a year later at the upper band. The central bank’s current forecast put the headline figure between 4.0-5.5% for 2024 and 2.5-3.5 for 2025.

The projected rise in inflation in the second quarter justifies a cautious shift in the monetary policy from April. The policy rate could still be reduced to 6.50% by the end of June, however, room for the continuation of monetary easing in the second half is limited, given the longer-lasting strict monetary policy of major central banks it added.

Erste argues that the acceleration in the pace of rate cuts last month was temporary. The MNB reduced the base rate by 100bp to 9% on the back of lower inflation, weaker growth data and positive developments in Hungary's risk assessment.

After the meeting, deputy governor Barnabas Virag called market expectations that the base rate will drop to 6-7% by the end of the first half realistic.

Expectations for more MNB rate cuts, coupled with some other factors, the risk-on mode of markets, and EU fund development, led to a spectacular bond rally, with the ten-year reference yields dropping well below 6% at end-2023. The new year brought an upward correction from an overbought market, and domestic fundamentals do not justify any relevant yield drop.

The forint has been on a weakening path again, with higher volatility due to geopolitical tensions and steeper rate cuts by the MNB. The central bank's cautious stance from the second half should help consolidate the EUR/HUF, according to Erste to 390. On Wednesday morning, the local currency fell to 399.5, the weakest level in more than a year.