Following the adoption of a comprehensive economic reform package in 1995, Hungary’s macroeconomic performance was impressive. Sound macroeconomic policies and appropriate structural reforms supported stable and high rates of growth and a reduction in inflation. In 2001, the orientation of the Hungarian policy mix was reversed: public expenditure increased significantly and generous wage policies were implemented. By 2003, the formerly ‘model’ accession country Hungary presented large macroeconomic imbalances, with a high government deficit, accelerating inflation and a widening current account deficit. Against this background, in the course of 2003 the central bank increased interest rates by 600 basis points to 12.5% in order to restore macroeconomic stability.

The expansive stance of fiscal and wage policies of the recent years, coupled with the resulting sharp monetary tightening, are likely to have negative consequences on growth. The extent and duration of these effects depend on the ability of the authorities to restore confidence in the market. The required adjustment channels are a tightening of fiscal policy, wage moderation, and further structural policies to foster the growth potential of the economy. Recent economic policy decisions seem to be going in the right direction.