Elevated borrowing costs are threatening the Hungarian economy, posing the risk of a credit crunch, according to the country's economic development minister on Thursday, adding that inflation needed to decline in order for interest rates to fall.

Hungary has the highest base interest rate in the European Union, at 13%. The central bank has faced pressure from Prime Minister Viktor Orban's government to slash credit costs due to the impact on the country's fragile economy.

Last month, the National Bank of Hungary reduced the top of its interest rate corridor by 450 basis points to 20.5%, Reuters news agency reports, clearing the way for additional rate cuts.

"Interest rates are high. The benchmark interest rate could average around 16% in 2023 based on market expectations," economic development minister Marton Nagy stated during a banking conference.

"Although there will certainly be additional rate easing in 2024... interest rates will still be high, especially in government debt financing," he added.

Nagy also said that government debt financing costs would rise to around 4% of GDP by 2024, compared to 2.8% of GDP last year, a rise of approximately 1 trillion Forints ($2.95 billion) over two years.

The minister added that curbing the central bank's forecast losses as a result of high-interest rates could impose a further burden on the budget.

Nagy said the way to leave the "trap" of high-interest rates is to "wrestle down" inflation, the Reuters report adds.

"On this issue, central bank and government policies are fully aligned. We need to reach single-digit inflation by the end of the year," he stated.

"But even with single-digit inflation at the end of the year, markets expect borrowing costs to remain in double digits. There is no life in the lending market at double-digit borrowing costs. The risk of a credit crunch is definitely rising." 


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