Gergely Szakacs

BUDAPEST, Reuters – Hungarian Prime minister Viktor Orban has slipped into a trap by extending a limit on fuel prices just days before Russia invaded Ukraine. This could complicate efforts to stabilize the country’s economy after April 3, parliamentary elections.

Confronted with an increase in inflation of near 15 years before the vote, the 58year-old nationalist leader placed caps on food, fuels and mortgages. The price restrictions on household energy bills were also extended since 2015.

Budapest believes these moves have reduced inflation by between 3 and 4 percentage points. But price growth picked up in February due to the fact that energy and food prices soared on global markets because of conflict in Ukraine. According to economists, inflation could reach double-digits by May-June when price caps expire.

GKI, an independent think tank, said that March’s regular survey, which tracks consumer confidence, showed an 11 point plunge. That is despite Orban’s pre-election spending spree of 1.8 trillion Forint ($5.38 Billion) to help households.

Some analysts believe that if oil prices rise above $100 per barrel after the election, then scrapping the fuel price limit in one stage will be politically impracticable and could cause another inflation shock.

According to price comparison website Holtankoljak.hu’s Friday report, the market price of gasoline was 641 forints per gallon. That compares with the 480 price cap per gallon that has been in place since November. The expiration date is mid-May.

National Bank of Hungary will likely raise its base rates by an additional 75 basis points on Tuesday. This is part of a string of aggressive rate rises that are being carried out to protect local markets.

“The NBH cannot curb fuel costs with rate increases. Peter Virovacz, ING economist, said that they could help keep inflationary expectations in check.

“The bank will need to address the psychological effects. A rise in inflation expectations could occur if petrol prices are higher than 600 forints.

REFUELING LIMITS

Tamas Pelter, Erste Bank’s oil and gas sector analyst, said that the price cap had been costing Hungarian Energy Group MOL 1.5 billion-2 billion forints each day. However, a recent decline in oil prices worldwide has brought some relief.

MOL failed to respond to my emailed comments.

Shell (LON 🙂 has put a 25,000-forint limit on fuelling at its Hungarian regular pumps. OMV has also imposed limits at OMV’s normal pumps at 100 litres and at the high-pressure diesel pumps at 300 litres.

Pletser stated that fuel price regulation and utility price reductions have a problem when prices diverge significantly. He also noted the failure to resolve similar attempts in Venezuela, an oil producer.

Economists believe that the rising energy price is also increasing pressure on Orban’s plan to curb household energy bills through state-backed price controls.

Pletser stated that it would require a 4- to 5-fold rise in electricity and gas prices for market level. Without which, the government would need to pump up to 1.5 trillion dollars into MVM state-owned energy company this year to make up its losses.

Citigroup Eszter Gargyan from the NYSE estimates that utility price cap will cost 1 trillion Forints (1.5% of GDP). He predicts an inflation rise of 10% if household utilities price curbs and the fuel price cap are removed.

MVM did not comment on the analyst predictions. According to the finance ministry, an increase in fiscal buffers could be used to offset unforeseen expenses.

Pletser declared that Hungary was awash with these hidden fiscal issues and they will come out after the election.

($1 = 334.52 forints)