The link between EU's ORD and ÁKK/MNB policy

HUNGARY - In Brief 29 May 2021 by Istvan Racz
On May 27, the EU Commission announced the approval of its Own Resources Decision (ORD) by all 27 member state parliaments. ORD will enable the EU to collect from member states annual fiscal contributions up to 2% of GNI, instead of the maximum 1.4% allowed so far, with a view to generating the required funds to put in place its extraordinary financial package, the Recovery and Resilience Facility (RRF).So now essentially implementation of the RRF can go ahead. For Hungary, this is expected to mean HUF2511bn (5% of annual GDP) of EU grants over the next 3-4 years. But with almost equal importance, Hungary is expected to get 13% of its total RRF quota, i.e. HUF326bn as an advance payment - essentially a loan free of interest - in one sum at some point during Q3 this year.The latter amount has not been taken into account as part of this year's financing plan for the government, meaning it will represent extra money. This extra should create some flexibility for the authorities, which they can use in different ways, like:- piling it up in cash reserves, expecting more trouble to come with an eventual activation of the new rule-of-law fiscal mechanism against Hungary;- cutting back the issuance of bonds, with a view to bringing bond yields lower;- reducing issuance and MNB purchases of government bonds, with a view to cutting back liquidity generation, in the new spirit of tightness of central bank policy; or- a combination of the foregoing.Of course, it is difficult to tell, but we would see the highest probability for the first two options - the government aiming at more cash reserves and lower bond yields - under current circumstances.

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