Hungary: Subdued recovery amid uncertain outlook

The 3Q GDP data significantly surprised to the downside. Consequently, we have reduced our FY 2024 GDP growth forecast to 0.5 percent. Additionally, a much lower carry-over effect and uncertainties surrounding the prospects of the main export markets have necessitated a downward revision of the GDP forecast for 2025 to 2 percent annually. Household consumption should continue to positively contribute to growth in 2025. However, in the absence of an impulse from external demand, we see more risks on the investment side. Nevertheless, the possible further normalization of the interest rate environment, planned targeted and subsidized loan programs (especially for SMEs), and the execution of delayed state investment projects could push investment growth into mildly positive territory in 2025. The 12-month inflation rate has been within the central bank’s target range for most of this year. Inflation is set to rise by year-end, but to a lesser extent than previously anticipated. Service provider inflation may continue its declining trend, while rising food prices, the volatility of the forint, and tax increases pose upward risks.

By the end of September, the policy rate reached 6.50 percent and has remained unchanged since then. The deterioration of global risk perception and the weakening of the forint exchange rate limit the central bank’s room to maneuver, so we no longer expect an interest rate reduction this year. The timing for the continuation of monetary easing has become rather uncertain. The weakening of the forint accelerated in the last quarter of the year. In real terms, the overvaluation of the forint has significantly decreased. Further significant weakening of the forint in the short term is not justified by fundamentals, so we expect a stabilization of the domestic currency, albeit at a weaker range than it traded in during the first three quarters of 2024. The overall vulnerability to external shocks is expected to remain, necessitating a positive interest rate differential.