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Op-Ed: Hungary’s easy money an alternative to German austerity?

By Matthew Turner     Jan 29, 2014 in World
Budapest - 2013 has been a good year for Hungary. After officially ending its recession in May, the country surpassed all expectations, achieving an impressive growth rate of 3.7 percent in the fourth quarter.
This fell in line with the general OECD average but outpaced its region and analysts are now predicting an even better 2014. It was only in 2008 that Ferenc Gyurcsány’s government contracted an emergency loan from the IMF in order to avoid insolvency. What followed was a deep crisis, with plummeting growth and sky-high unemployment, caused in part by poor government policies.
Under Viktor Orban’s management, Hungary has managed to stave off a Greek-style default. Hungary is one of the few European countries that have respected the European Union’s Stability and Growth Pact, which sets rigorous macroeconomic targets. Surprisingly enough, Hungary’s budget deficit has been holding steady under 3 percent, despite the fact that public finances were being consolidated at the same time. Moreover, the government announced in August the repayment of its €2.15 billion outstanding debts to the IMF in full and ahead of schedule.
Inflation is also surprisingly stable for a country that, as recently as three years ago, had a -7 percent drop in GDP. It bottomed out in December at 0.4 percent, the lowest reading for 43 years. This was not a fluke event, but a calculated outcome, as the National Bank is trying to create the necessary conditions for a long-term low inflation environment, targeted at 3 percent.
The government has sought to stem price growth and buoy the recovering economy by imposing tariff cuts on utility companies, electricity prices for consumers having already been slashed twice to the tune of 20 percent. The policy proved successful enough that the government is even considering a third cut, expected to hover somewhere around 10 percent. According to JPMorgan Chase, this new round would keep inflation at less than 2 percent for 2014 and prompt rate setters to extend the easing cycle.
Easy Money and the forint
Hungary’s National Bank took analysts by surprise when it lowered the interest rate on January 21st by an unexpected 15 basis points, as the monetary council decided to ease its 0,20 increment, in place since last year. It is the 18th consecutive cut in as many months, bringing the rate down to 2.85 percent from its 7 percent high point in 2012. Rate setters explained that their decision was triggered by the “improvement in the pace of economic growth”..
The National Bank has announced plans to continue its easy money policy in support of the government’s economic program if financial markets prove to be stable enough. Low interest rates are popular with the electorate and have helped increase consumer confidence in recent years, prompting the Governor to reduce it in small increments each month.
In its most recent move, the National Bank announced that it will slow interest rates cuts, while the Governor said in December that the key rate may bottom out at 2.5 percent. The aim is to put critics to rest, who fretted in the past about the forint’s stability, which at 300 to the euro is considered weak, given the imports of oil and gas Hungary has to pay for each month.
This move is part of a wider regional context. Following the Fed’s decision on December 18th to ease its monthly bond-buying program from $85 billion to $75 billion, many have feared that investors will pull out of risky emerging markets. In an effort to counter such fears, Eastern European central bankers have already reduced interest rates, or are planning to follow suit in the near future.
In Hungary, lower interest rates have also managed to assuage investors and counter any effect the Fed’s tapering might have had. Despite its poor performance compared to the euro, the forint was ranked among the five best performers against the dollar in the fourth quarter of 2013, according to a study performed by Bloomberg on emerging markets.
However, some have dismissed the government’s handling of the economy, arguing that the temporary takeover of assets from private pension funds or the slapping of a tax on banks, telecommunications and energy companies is populist. For hardcore liberal observers, such policies scream anathema. Nevertheless, the dominant response from global financial markets has been positive. The easy money policy has led to a decrease in the spread over the German bund, which narrowed to 330 basis points, a level last reached in 2007, resulting in lower borrowing costs for Budapest.
Such an approach perhaps stands as a workable alternative to the German-style austerity measures that are so popular with the European bureaucratic elite. Polls now show Orban’s FIDESZ party enjoying a respectable lead over all other political forces, proving the popularity of his measures with the electorate. As Hungarians are gearing up for parliamentary elections, scheduled for April 6th, the incumbent Prime Minister seems on the fast track to obtain a second successive term in power.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of DigitalJournal.com
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