Here is why Hungary’s inflation is the highest in the region

The International Monetary Fund (IMF) recently published an analysis on why Hungary has the highest inflation in the region. It lists reasons like fiscal spending during the COVID-19 pandemic and low interest rates. The rate of price increases is probably peaking right now. However, the organisation’s experts say it is important to avoid soaring inflation that remains high.

Inflation in Hungary is the worst

In January, annual inflation in Hungary rose to 25.7 percent. That is, a record high not seen since 1996. Hungarian inflation is lagging behind other countries. While most European countries have seen some easing, Hungary has seen only an increase for years, Portfolio writes. The IMF examined, among other things, the specific features of Hungarian inflation, which are causing it to rise steadily.

Since 2020, the economy has been hit by a series of shocks that have fuelled inflation. As a result, countries have done their best to support the most vulnerable groups in society. For example, central banks have cut interest rates to virtually zero. The IMF analysis showed that Hungary has been at the forefront of easing.

Of the central banks surveyed, only Turkey expanded its balance sheet proportionally more than the Hungarian central bank between early 2020 and November 2022. Loose economic policy has helped to strengthen the recovery from the pandemic. This was compounded last year by rising food and energy prices due to the war between Russia and Ukraine, and disruptions to suppliers. As a result, inflation around the world has continued to rise.

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Fiscal stimulus

In Hungary, the fiscal stimulus ahead of the 2022 parliamentary elections has added to this, the analysis says.

First in 2020, the budget was eased in response to the pandemic. Then, another stimulus came in late 2021-early 2022, ahead of the elections, despite a strong economic recovery. In parallel with fiscal policy, monetary policy has also loosened significantly in recent years. These two were among the loosest in the EU between 2020-22, analysts add.

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Plus the weakening forint

The Hungarian currency weakened more against the dollar in 2022 than most emerging market currencies. In addition, the depreciation of the forint last year was very pronounced. This, in itself, increased the impact of the exchange rate on inflation. It is estimated that this could be as high as 30 percent, meaning that every one percent weakening of the forint alone could add 0.3 percentage points to inflation.

What is more, price freezes and interest rate freezes are not the best ways to try and curb inflation. Price freezes and interest rate freezes are costly, inefficient and undermine monetary policy’s efforts to bring down inflation, the analysts stress.