Hungary to boost pension spending amid higher-than-expected inflation

BUDAPEST, March 27 (Reuters) - Hungary's government will boost pension expenditure by 90 billion forints ($242.18 million) this year to take account of higher-than-expected inflation, now seen at 4.5% for 2025, Prime Minister Viktor Orban's chief of staff said on Thursday.

Hungary suffered the European Union's worst inflationary surge after Russia's 2022 invasion of Ukraine. Despite a decline last year, some economists say Hungary's inflation could once again become the highest in the EU in 2025.

The central bank, which left its base rate steady at the EU's joint highest level of 6.5% on Tuesday, now sees average inflation this year at 4.5% to 5.1% and its new governor, Mihaly Varga, said tariff hikes and buoyant services and food prices posed upside risks to that forecast.

Orban's government has also raised its inflation forecast sharply to 4.5% from 3.2% after Varga, a former finance minister, attended this week's cabinet meeting, chief of staff Gergely Gulyas said.

"The government projects 4.5% inflation this year, while the central bank's forecast is also for at least 4.5% price growth," Gulyas told a media briefing. "This imposes a legal obligation on the government to pay a supplementary pension increase."

Hungary's budget deficit soared to more than 40% of the full-year target in the first two months on higher pension spending, debt-servicing costs and energy subsidies.

Orban launched food price controls last week after price growth rebounded to the EU's highest level, potentially denting the veteran leader's hopes of re-election next year.

Orban has also unveiled large-scale tax cuts for mothers in the run-up to the vote, while committing to a further reduction in Hungary's budget deficit and debt levels.

However, the central bank has warned that higher tariffs could dampen economic growth in Hungary, one of the EU's most export-reliant nations, and put upward pressure on inflation, complicating Orban's fiscal stabilisation efforts.

U.S. President Donald Trump has unveiled a 25% tariff on imported vehicles, expanding a global trade war and prompting criticism and threats of retaliation from affected U.S. allies.

Gulyas said the EU should talk to Washington about the tariffs, adding however that the bloc's failure to align its own tariffs on imported vehicles from the U.S. after Trump took office had contributed to the current outcome.

($1 = 371.62 forints)