Economic Challenges and Response
Hungary faced a considerable surge in inflation last year, reaching 25%, the highest in the European Union and resulting in a recession. Although growth is expected to resume in 2024, a recent Reuters poll suggests that the economy may fall short of the government’s 3.6% forecast. In response to these challenges, the government proposed applying Treasury bill yields as the benchmark lending rate for corporate loans in order to stimulate economic growth.
Central Bank’s Concerns
The central bank’s press office did not provide a direct response to inquiries regarding the impact of the market’s reaction to the government’s plan on the likelihood of a 100 basis points reduction in the bank’s base rate next Tuesday. However, the central bank’s criticism indicates concerns that replacing the Budapest Interbank Offered Rate (BUBOR) with Treasury bill yields would overly restrict the central bank’s policy options.
Government’s Reaction
The government, on the other hand, has responded by accusing the central bank of mishandling the root cause of the issue. The spread between BUBOR and Treasury bill yields has widened to approximately 250 basis points. Economy Ministry State Secretary, Mate Loga, stated that ongoing discussions with local banks about the government proposal would likely result in a significant decrease in the interest rates applied in new contracts, potentially aiding economic growth.
Market Implications and Outlook
The forint currency experienced a 0.5% gain, rebounding from three-month lows following the government’s proposal. This recovery was also influenced by expectations that the central bank will accelerate the pace of rate cuts in the upcoming week. Prime Minister Orban’s government, facing European and local elections this year, has been urging the central bank to do more to support the country’s economy. The central bank has already lowered interest rates by a cumulative 725 basis points since May.