High Inflation, Interest Rates at 13%, and a Weak Economy
The National Bank of Hungary held its base rate as expected at 13% as expected at its May meeting and noted the need to keep interest rates high for a prolonged period to ensure anchored inflation expectations and to hit the bank's inflation target. In April, the annual inflation rate declined to 24%, while the core index was 24.8%.
We have high inflation and interest rates well into double digits which is seeing the economy weaken.
“The rapid deterioration in domestic demand is bad news for both the retail sector and industry, as they continue to struggle. With the latest set of data showing continued weakness, we expect the economy to remain in a technical recession.” (INGTHINK)
High inflation and elevated borrowing costs have hit economic activity in Hungary, which can be seen in the latest data released by the Hungarian Central Statistical Office (HCSO). For example, Year-on-year the volume of retail sales dropped by 13.1%, while industry took a 4% plunge in the volume of production (both working-day adjusted data). The eurozone economy is also weakening which will impact Hungarian exports.
Investor Confidence
Another problem is investor confidence: “Hungarian Prime Minister Viktor Orban’s government is pushing back against growing criticism over fiscal management that investors say may push the recession-hit economy into a negative spiral. Finance Minister Mihaly Varga insisted the country’s plans are on track after the European Commission pointed this week to “weaknesses in budget planning and execution” and “ad hoc” spending it said was making a bad situation worse.” (Bloomberg)
In times of economic expansion, a high-interest rate is attractive but not in a big contraction with confidence in the Government low. We expect the USD to firm up and move sharply higher in the coming months.
Technical Analysis
We expect an upside breakout to follow on to the upside – if we were to break support we would lower our entry and will do an updated article if this scenario unfolds.
