It has been 38 years since the inflation rate was this low, as consumer price increase for the entire year will be below 2 percent. According to the prognosis of the Ministry for National Economy, inflation will also remain benign in the coming years, Minister of State for Taxation Gábor Orbán said at a press conference.

He stated that on the basis of these facts it can be concluded that price stability has been achieved in Hungary which may also underpin budding economic growth. Gábor Orbán stressed that the 1.8 percent economic growth in the third quarter of 2014 is above analysts’ prior estimates and it is obvious that growth is based on a sounder economic structure which can ensure a period of lasting expansion. Besides exports, he added, improving household consumption and investment volume were also key factors behind this good figure.

Gábor Orbán underlined that the consumer price index for this year shows a low figure which has been unprecedented for several decades and which to some extent is also attributable to the Government-mandated, multi-step public utility tariff cuts. He pointed out that tariff cuts introduced in January 2013, which lowered prices for gas, electricity and district heating, decreased inflation by 0.9 percentage points. The public utility tariff cut in July – concerning sewage, water management and chimney sweeping charges – trimmed another 0.2 percentage points off the inflation rate. He added that further measures in place since November have reduced inflation by another 0.9 percentage points. As a whole, these measures left some HUF 300bn per year more at households. This amount equals some 1 percent of GDP and acts as a crucial element for lifting household consumption.

With regard to the quarterly GDP figure, the Minister of State stressed that the OECD and the European Commission had recently also acknowledged the performance of the Hungarian economy and accordingly revised their former prognoses on Hungary. Moreover, the latest report by the European Commission was the most positive one in nine years.

He pointed out that growth based on a sound structure runs parallel to fiscal balance. Thanks to strict fiscal policy, over the past three-and-a-half years the fiscal deficit remained steadily below 3 percent and the government debt-to-GDP ratio also decreased meaningfully.  Thus, he added, the costs of financing general government debt also fell significantly and the yields on government securities have recently reached a record low level. Chances are good, Gábor Orbán emphasised, that after getting rid of the excessive deficit procedure, the period of paying heavy amounts for the servicing of government debt may also be over.

He reminded journalists that Hungary’s population has already suffered under tough periods of high inflation, for example as hyper-inflation annihilated what had remained of the Hungarian economy after the Second World War and as in the mid-90s the so-called Bokros package largely depreciated household income by generating an inflation rate of more than 30 percent. In light of this, the record low inflation rate is especially welcome and the favourable effects of benign inflation are expected to materialize soon.

Muted price increases underpin balanced growth, as they provide a more predictable economic environment for market participants. He pointed out that the National Bank of Hungary cut the base rate in harmony with the inflation outlook. The note bank’s lower base rate resulted in lower expected yields which in turn boost investment and facilitates growth for the coming years, he explained. Finally, he said that the importance of fiscal discipline as a factor behind falling yields must be stressed, “By placing the government debt on a downward path the Government also remedied Hungary’s financial vulnerability which also underpinned the lowering of interest rates through the lowering of risk premia,” the Minister of State said.

(Ministry for National Economy)