Inflation raises the stakes in Hungary’s war against the EU

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Viktor Orban, primer ministro húngaro, el 14 de junio viendo un Inglaterra-Hungría de fútbol, en Wolverhampton.
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Likely to choose the harm of raising rates over giving in to Brussels to unlock recovery funds

The worsening economy raises the stakes in Viktor Orbán’s fight against the EU. Unless he agrees to drastically higher rates, the Hungarian prime minister’s main source of relief is to unlock 7.2 billion in funding. He is likely to choose economic damage over political surrender.

Despite inflation reaching 11% in May, and 19% for food, the Budapest central bank has wavered on monetary tightening. On Thursday, it unexpectedly raised the one-week deposit rate by 50 basis points. But that was only after the forint plunged to a record low of more than 400 against the dollar, amid concerns about his desire to raise borrowing costs.

With central banks in Europe, Switzerland and the US cracking down on inflation, smaller economies have minimal room for manoeuvre. But some of Hungary’s damage is inflicted by Orbán. This €160bn economy is struggling to secure €7.2bn in EU funding, after Brussels froze access in protest at Budapest’s internal politics.

Unlocking cash would boost the forint, and help against inflation. But it doesn’t look like Orbán is going to budge. In May he accused Brussels of “abusing his power day by day”, pointing to its history of intimidating the media and the courts while cracking down on the rights of minorities such as immigrants and homosexuals. His fourth consecutive electoral victory in April also gives him a powerful internal mandate to keep the race going. Finally, Hungary’s opposition to a European embargo on Russian energy imports may give Orbán a useful advantage against the bloc.

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Since 2010, the secret to his success has been keeping the economy and investors on his side while tightening his political grip. The simplest solution to keep that sweet spot of power and prosperity intact comes at too high a political price. But the alternative – very high rates – will impose heavy economic costs.