Hungarian monetary policy risks disorderly forint fall

Significance

This is despite a spike in core inflation. The three central banks of Central Europe (CE) are on a loosening cycle, responding aggressively to the COVID-19-induced collapse in growth while expecting the contraction to bring down core inflation rates later this year.

Impacts

• PMI surveys for Hungary, Poland and the Czech Republic show persistent expectations of contraction.
• The Commission expects Czech GDP to contract this year by 7.75%, the pandemic disrupting foreign demand for export-oriented manufacturing.
• Hungarian GDP is to shrink by 7% with labour market deterioration curbing household consumption and falling exports hurting the auto sector.
• Contraction in Poland’s resilient and diversified economy by just 4.5% in 2020 is forecast to be the least-bad in the EU.
• Hungary’s mixed record in handling of the crisis could put the ruling Fidesz party’s position at risk.