Hungary Falls Deeper Into Recession as Inflation Slows

Hungary slipped deeper into recession in the fourth quarter while the fading effects of tax increases slowed inflation, boosting policy makers’ case to continue cutting the European Union’s highest interest rate.

Gross domestic product shrank 2.7 percent in October-December from a year ago, the deepest slump in three years, the statistics office in Budapest said today based on preliminary data. The median estimate of 18 economists in a Bloomberg survey was for a 1.9 percent drop. The economy shrank 0.9 percent from July-September, a fourth consecutive quarterly decline. The inflation rate fell to 3.7 percent in January, the lowest since September 2011, from 5 percent in December.

Hungary’s second recession in four years and slowing inflation give the central bank room to continue cutting interest rates after reducing borrowing costs by 1.5 percentage points in the last six months. A new central bank chief, to be appointed by Premier Viktor Orban by March 2, may also push for the use of more unconventional monetary measures before parliamentary elections in the second quarter of next year.

Today’s data put “Hungary at the back of regional growth pack alongside Slovenia, which is in the middle of a banking crisis,” Tim Ash, a London-based analyst for Standard Bank Group Ltd., said in an e-mail. “This increases the chances that the Orban government will further reach for unorthodox policy levers as they head into election season.”

The forint dropped 0.6 percent against the euro, the most in a week, and traded at 291.71 at 9:19 a.m. in Budapest.

Conflicting Outlooks

The government, which expects 2013 will be a “turning point” for the economy, will wait until first-quarter data is published to determine whether changes are necessary to this year’s budget or to the Cabinet’s forecasts, minister for aid talks Mihaly Varga said in an Inforadio interview today.

While the government said Jan. 25 that the economy may grow more than the forecast 0.9 percent this year as car production and agriculture output rise, the International Monetary Fund on Feb. 11 said it may stagnate in 2013. Hungary needs to overhaul its economic policy to boost growth, said Iryna Ivaschenko, the IMF representative to Budapest.

Government Policy

The government levied extraordinary taxes on banking, energy, retail and telecommunications companies, nationalized privately managed pension fund assets and curtailed the power of courts, damaging investments and investor confidence. Exacerbating the slump was a drought that hit agriculture output, while the euro region’s debt crisis weakened exports and western banks withdrew funding last year. The economy contracted 1.7 percent in 2012.

Outgoing central bank President Andras Simor has been outvoted along with his two deputies on rate cuts by non-executive members who want to spur an economy battling its second recession in four years and who forecast meeting policy makers’ 3 percent inflation target in the medium-term. The bank on Jan. 29 lowered the two-week deposit rate by a quarter-point for a sixth month to 5.5 percent, the lowest since 2010.

Policy makers will lower the rate to 5.25 percent at a Feb. 26 meeting, matching a record low level last seen in 2010, according a Bloomberg poll of 18 economists.

Simor’s Successor

The drop in the January inflation index was primarily caused by the high base from a year ago due to value-added tax increases, statistician Borbala Minary told reporters today. The effects of a 10 percent cut in household energy prices from Jan. 1 will show up in the inflation rate next month, she said.

Economy Minister Gyorgy Matolcsy, who spearheaded the government’s self-described unorthodox policies such as pension fund nationalizations and industry tax increases, is the front-runner to succeed Simor, Nomura Holdings Plc and Standard Bank Group Ltd. said in reports on Feb. 12 after meeting with officials in Budapest.

The central bank should pursue a “conservative” policy course, avoid “surprises,” and “absolutely not” engage in budget financing, Matolcsy said in an interview with the Wall Street Journal on Jan. 30. The minister “essentially backtracked” on comments made in December -- when he called for the “brave” use of “unorthodox” monetary-policy tools -- in an effort to endear himself to investors, Royal Bank of Scotland Plc said on Feb. 1.

Hungary this week raised $3.25 billion in its first sale of foreign bonds in 21 months, taking advantage of global liquidity conditions to return to the debt market after Orban abandoned a quest for International Monetary Fund support.

Orban is “likely to portray the market’s strong interest in Hungarian debt as legitimizing his unorthodox social, economic, and fiscal policies, in our opinion,” RBS’s London-based strategist Phoenix Kalen said in an e-mailed note yesterday. This makes Matolcsy’s appointment to the central bank “more secure.”

Before it's here, it's on the Bloomberg Terminal.