Hungary: Finding the inflation peak
With positive underlying growth momentum set to keep inflation on an upward trajectory in the near future, the key question is where prices will peak. Details of the strong first-quarter GDP, mounting global challenges (oil embargo and other supply-side shocks), producer prices, and corporate surveys about pricing power are all pointing to a further acceleration in inflation. We see the peak at 11.7% year-on-year in September followed by a slow and gradual decline amid sustained labour shortages and continuing positive real wage growth.
Markets did not respond well to fiscal changes, which amount to 3% of GDP (more than enough to meet the deficit target in 2022) but contain windfall taxes for eight sectors worth 1.3% of GDP. The forint has been stumbling on this and carries a sizeable risk premium. The National Bank of Hungary is clearly committed to tightening further but will reach the terminal rate in a gradual manner. We see the end of the tightening cycle at 8.25% in the fourth quarter, but we assign a significant chance to the terminal rate reaching roughly 9.00%, if inflation surprises on the upside again and/or HUF shows no sign of relief in the short run.
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Romania: A strong economy makes the central bank's job easier
The +5.2% GDP advance from the first quarter was the second-highest quarterly advance in history and markedly improved the 2022 outlook. Assuming no significant data revisions, even a quasi-stagnant economy for the rest of the year would still bring the annual GDP advance in 2022 to at least 5.0%. Add to this average inflation of around 12.5% and the nominal GDP advance will easily exceed 15% in 2022. This will, in turn, make it a touch easier for the government to stick to its 5.8% budget deficit target in 2022. However, the pressure on 2023 budget spending is already shaping up to be massive, as increases in wages and pensions will most likely be sensibly below inflation this year and the pressure for a more rapid indexation will only grow.
The higher-than-expected GDP numbers are likely to make it easier for the National Bank of Romania to at least maintain its 75bp hiking pace at the July meeting. However, we keep unchanged our forecast for the key rate not to exceed 5.50% this year. In the context of a persistent liquidity shortage for the rest of the year, the relevant rate will in fact remain the credit facility (100bp higher than the key rate).
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