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Hungary fell back into recession in 2012, but real GDP is projected to expand from mid-2013. Headline inflation accelerated sharply owing to higher fuel and food prices, and hikes in indirect taxes. Inflation expectations have risen above 6%, calling into question the credibility of the inflation target.
Fiscal consolidation has continued, with targeted tax cuts being more than offset by other measures which will weigh on economic activity. The rapid conclusion of an agreement with multilateral organisations, which is assumed in the projections, is critical to growth, as it would lower the cost of funding, improve investor confidence and support domestic lending. Further easing of the monetary stance would be warranted only once headline inflation durably falls back to the central bank’s inflation target of 3%.