MNB ups deficit forecast for 2014 to 2.9% of GDP

MNB

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The National Bank of Hungary (MNB) forecasts Hungary’s 2014 general government deficit, calculated according to European Union rules, will reach 2.9% of GDP this year, in line with the government target, the central bank said in its latest inflation report, released today.

The projection was raised from 2.5% of GDP in the previous quarterly report published in December; the general government deficit was reforecast at 3.0% of GDP, the EU’s threshold.

Baseline inflation projections in a report released earlier this week show average annual CPI reaching 0.7% in 2014 and 3.0% in 2015. The projection for 2014 was lowered from a 1.3% forecast in the December report, while the projection for 2015 was raised from 2.8%.

The MNB kept its projection for core inflation for 2014 unchanged at 3.0%, but raised the projection for 2015 to 3.5% from 3.0%. The report noted that the forint’s weaker exchange rate would “gradually shape” developments in underlying inflation in the coming quarters, but added that subdued domestic demand could “substantially limit” costs passed onto consumers as compared to the period before the crisis.

Inflation is expected to “steadily rise” toward the medium-term 3.0% inflation target over the forecast horizon, according to the report. It added that inflationary pressure from foreign trade partners “might also remain subdued” and that restrained wage dynamics and lower inflation expectations supported the low inflation environment.

MNB report authors acknowledged the “considerable” impact on inflation of reductions in regulated prices and said regulated price cuts approved at the start of 2014 would take 0.2% off CPI in 2014 and subtract 0.3% in 2015. The central bank staff said they assumed regulated energy prices would not rise until the end of the forecast horizon, adding that “restrained dynamics” in the regulated prices of non-energy items are also expected.

The report also noted the effect on inflation of other government measures that translate as indirect taxes. These include an increase in the retail margin on tobacco, a levy on financial transactions and the recently-mandated mandatory two free cash withdrawals per month at ATMs. The report put the combined effect on CPI of the three at 0.6% in 2014.

The MNB kept its projection for GDP growth this year unchanged at 2.1% in the report, but raised the projection for 2015 to 2.5% from 2.4%. The staff said investments and exports would be the main drivers of growth. European Union-funded government projects as well as spending by SMEs that get cheap credit from the central bank’s Funding for Growth scheme underpin investment growth, they added.

Household consumption may “only pick up gradually,” according to the report, because of the process of deleveraging and the slow easing of precautionary considerations.

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