EU's highest inflation to come down to 7-8% by December, says Hungary FM Mihaly Varga

Hungary's annual inflation will slow to 7-8 per cent by December from 20.1 per cent in June, helping the economy rebound, Finance Minister Mihaly Varga told Reuters, adding that no further measures were needed to contain the budget deficit for now.

Prime Minister Viktor Orban's government is struggling with the highest inflation in the European Union, a cost-of-living squeeze that has eroded household purchasing power and slammed the brakes on consumption.

In an interview on Wednesday, Varga said curbing inflation was also key to containing the deficit, which has seen energy subsidies, pension and debt service costs surge, widening the cash-flow-based gap to about 85 per cent of the target by end-June.

"By December for sure, but if we are lucky, inflation will be below 10 per cent already in November. I can say that inflation will be around 7-8 per cent by December," Varga said.

"I'm optimistic that this region has enough potential that if it can overcome the energy situation and inflation then ... the CEE (Central European) countries can again be the fastest growing economies in the European Union."

The forint has firmed to 379 versus the euro from all-time lows of 430 in October, supported by high rates | Image Credit: Pixabay

The government expects the economy to grow by just 1.5 per cent this year, but pick up to 4 per cent next year. Analysts have warned that sliding consumption would reduce tax revenues and the deficit will overshoot the target unless the government takes additional measures to contain spending.

Varga said it would be too early to take steps on spending.

"For the time being, I see no reason for such measures... in September we will have a review and if needed, the government will take measures. I'd like to leave the (3.9 per cent) deficit target intact," the minister said, adding the government was also sticking with its 2.9 per cent deficit goal for 2024.

To this end, he said the government would amend the central bank law effective Jan. 2024 to avoid having to cover the bank's losses from the budget. The government will discuss the planned changes with the European Central Bank soon, he said.

"We have agreed with the National Bank of Hungary that we propose a solution to the ECB that ... would allow the NBH to correct its losses over the medium term, that means about 3-5 years," Varga said. "Having a negative equity poses no threat to the operation of the central bank."

Stable forint needed

After recording big gains from quantitative easing for years, several central banks have recently reported losses as interest rates rose, including the NBH which had to launch an emergency 18 per cent one-day deposit in October -- the highest in the EU -- to shore up the falling forint. The bank has since reduced the rate to 16 per cent but it says easing will be gradual.

Varga said a stable forint was crucial for economic players to be able to plan ahead and the concept that a weak currency was needed to boost exports "was a notion of the past," chiming in with recent NBH comments.

"Our problem is when the forint weakens 20 forints in a week, by 4 per cent, then nobody can plan," he said.

"If interest rates come down theoretically it is conceivable that the exchange rate would weaken ... but if the other segments of the economy improve ....then the NBH's monetary policy strategy that it reduces rates in 100 bps steps by the year-end, taking the base rate to 10 per cent -- it could work without the exchange rate producing swings, remaining stable."

The central bank will hold a rate meeting on July 25 where it is expected to cut the one-day deposit rate again by 100 basis points, to 15 per cent.

When asked how Hungary would cope if the EU -- which has a rule-of-law dispute with Orban -- does not disburse suspended EU funds this year, Varga said he expected both recovery funds and cohesion funds to start flowing.

"I trust that we will not have to prepare an fx bond issue, so talks on EU funds will accelerate," he said.