We expect the current account to be in surplus in 2023

As economic activity has been weakening, the collapse in domestic demand is rapidly reducing the need for imports. In addition, as the energy issue appears to be easing this year, the pressure on the trade balance from the import side is easing significantly. Conversely, the export side is still supported by new EV battery plants, while carmakers are still dealing with some backlogs.

Taking all these factors into account, it is hardly surprising that the trade balance has been in surplus for five months, while the current account also posted a surplus in the second quarter, according to preliminary data. Against this backdrop, we lift our forecast and now see the current account balance reaching a surplus of 0.3% of GDP in 2023. However, a further slowdown in the global economy could weaken export prospects, limiting the upside to this forecast.  

Trade balance (three-month moving average)

Inflation will fall below 8% by December, but 2024 brings challenges

Headline inflation sank to 17.6 % YoY in July, mainly on base effects, while prices rose by 0.3% compared to June. At the component level, food inflation continued to moderate, while the slump in domestic demand was reflected in both durable and non-durable goods prices. In our view, the rapid deterioration in firms' pricing power is evident and will only accelerate going forward as competition among retail outlets for households' overall shrinking disposable income intensifies.

We expect headline inflation to fall below 8% by December, but next year brings a number of upside inflationary pressures, such as the increase in excise duty on fuel prices and a possible 10% minimum wage increase. In addition, this year's budget revision, due in September, will include some tax increases, which we believe will pose further second-round inflationary risks.

Inflation and policy rate

Our interest rate forecast has changed due to recent hawkish message

At the August meeting, policy normalisation continued as the National Bank of Hungary (NBH) cut the effective interest rate by a further 100bp to 14%. The main takeaway from the meeting was that the autopilot will be switched off after the September rates conversion, a clear hawkish pushback against "excessive rate cut expectations". With a data-dependent approach, the NBH will focus on both the inflation outlook and maintaining market stability, so nothing is set in stone.

Moreover, the plan to manage the highest positive real interest rate in the region will shape the NBH's decision-making function, which will both strengthen disinflation and make HUF assets more attractive. In our view, the second phase of monetary policy normalisation will bring a first rate cut in December, with a 100bp step. As for October and November, we currently expect a pause, as the NBH will continuously assess the risk environment, paying special attention to the uncertainty surrounding the EU funds and pro-inflationary risks going into 2024.

Real rates (%)