Macroeconomic Forecast Hungary

The central bank (NBH) kept interest rates on hold at 6% in October following 12 months of cuts, despite a record low inflation rate of 3.2%. We predict that concerns over the twin deficits, and widening policy divergence between the NBH and both the government and opposition parties, will mean rates remain on hold until 2006. A likely rise in rates by the ECB in December might even lead to corresponding NBH hikes. With local and national elections in 2006, the budget deficit is likely to deteriorate before it improves, but FDI inflows are still strong, and further privatisation revenue should plug public spending gaps into 2006. Government commitment to Europe remains a solid long-term policy anchor, and we maintain our predictions of an improved current account deficit of 5.6% of GDP in 2006, with growth at 4.6%

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