2006 was a bad year for Hungary in terms of inflation, central bank governor Zsigmond Járai said in an end-of-year wrap-up on Friday.
In autumn 2005, National Bank of Hungary experts still thought inflation would fall in 2006, possibly to 2% or even less by year-end. The VAT reduction at the beginning of the year did cause inflation to slow significantly, however, the VAT rise in September reversed the trend, bringing CPI to around 6% by December, Járai said. „The year 2007 will be no better from this point of view," he said. Inflation will rise further in the first half of the year, partly due to price rises, including centrally-regulated ones, at the beginning of the year. CPI could reach 7-8%, before falling back to around 6% towards the end of the year," Járai said. It is already clear that centrally- and locally-regulated price rises will be higher than earlier expected by NBH experts, he added. If positive trends prevail or strengthen, inflation could return to around 3-4% by the end of 2008, he said. If inflationary expectations strengthen or if the global economy takes a turn for the worse, „we could be forced to raise the base rate," he said.
The year 2006 was also difficult from the point of the view of the forint. „Although the forint is strong at the moment, its exchange rate fluctuated significantly through the year," he said. The central bank tried to keep interest rates at a level, which would reduce inflation as well as minimize changes to the forint's exchange rate. Járai said the current strong forint rate is primarily due to the positive global environment. The large of amount of liquidity waiting to be invested around the world means Hungary must pay a lower interest premium. He also conceded that the government's efforts to consolidate the budget were well received by investors, which is reflected in the forint rate. Although it is true that the government debt is high and it will continue to rise, investors are focusing on the fact that the government has taken a major step towards reducing the budget deficit through next year's budget adopted by parliament. „If the government consistently implements next year's budget, the 6.8% budget deficit target can be achieved," he said.
Still Járai criticized the government's convergence program for placing too much emphasis on narrowing the deficit and not enough on spurring growth. He added that there were no signs the government planned other measures to boost growth in the long term. He said the structure of the government's consolidation program was bad, as it creates more bureaucracy, raises taxes and makes the tax system even more difficult to understand. This only encourages more activity in the gray economy, he said. Because of the convergence program, Hungary's competitiveness has remained behind that of neighboring Poland, Slovakia and the Czech Republic. While Slovakia's economy expanded 9-10% in the last quarter of the year, Hungary's economy is expected to grow just 2-2.5% in the coming year. Járai said the National Bank of Hungary's MPC would take all necessary steps to keep back inflation. "All members of the MPC are committed to raise the central bank's base rate if the inflationary outlook deteriorates," he said. He added that it is not the job of the central bank to spur growth by lowering rates. That is the job of the government through its economic policy, he said. (Mti-Eco)