Simor suggests more predictable economic policy would support growth

Outgoing National Bank of Hungary governor András Simor suggested that a more predictable economic policy could clear the way or potential economic growth in an interview with MTI published on Monday.
    Simor said he had not commented on the government's economic policy during his six-year term as governor, with the exception of a temporary government scheme allowing early repayment of foreign currency-denominated mortgages at discounted exchange rates. But, just a few weeks before his mandate ends, on March 2, he suggested removing obstacles to potential economic growth would be a policy move in the right direction.
    "Investments will only pick up if businesses can count on a stable, secure regulatory and legal environment over 3-5 years, if the government does not introduce extraordinary taxes, if business sectors don't disappear from one day to the next, or if regulated prices are not frozen or reduced, making it impossible for sectors to do business," Simor said. "These must be changed, predictability and stability must be put at the centre of economic policy," he added.
    The Fidesz government has introduced a number of targeted taxes on the energy, retail, telecommunications and banking sector. Simor said change must be achieved in the banking sector so financial institutions have an incentive to boost lending activity. They should not think that whatever profit they make will be taken away by the state, he added.
    Simor said Hungary's potential economic growth rate was around 1.5% in 2008, but the country had since fallen "well behind", unable to keep up not only with countries in the centre of the European Union but also with its competitors in the region. While Hungary was ranked third in terms of per capita GDP after Slovenia and the Czech Republic in 2000, now the country is ahead of only Romania and Bulgaria, he added.
    Citing the central bank's projection, he put Hungary's potential growth rate in 2012-2015 at 0-0.5%.
    Simor, who, together with his deputies, have unsuccessfully tried to prevent external rate-setters from easing monetary policy for about half a year, said lower rates had done little to boost lending, offering proof that high rates were not, at least in Hungary's case, an earlier hindrance to lending.
    He attributed continual overshoots of the MNB's 3% mid-term inflation target during the past six years to tax changes, energy and commodities prices, and the forint's weakening. Prices have risen as a direct effect of VAT and excise tax increases, while sectoral-based taxes have fed into prices indirectly; energy and commodities prices have risen on global markets, and the forint has weakened about 20% since 2007, he added.
    The effect taxes on inflation usually dissipates in a year, which does not require monetary tightening, but in the past six years the governments has made tax changes affecting consumer prices with a degree of regularity that has made households accustomed to high inflation, he said.
    He acknowledged the disinflationary effect of a recent government mandated reduction in household energy prices, but said he would not comment on the sustainability of such measures.
    Simor said every 10% weakening of the forint results in a 3% rise in prices over two year, citing an analysis by the MNB.
    Responding to criticism that the central bank has paid too little attention to the effect of monetary policy on growth, Simor said the MNB's monetary policy has taken into account the interests of the real economy and has not aimed for a drastic reduction in the rate of inflation.
    Simor said the MNB's level of international reserves could be reduced at present "only at great risk". He explained that the reserves were level with the amount of short-term foreign currency-denominated government debt which approaches €34 billion at present. If Hungary had a precautionary credit line from the International Monetary Fund, the reserves could be smaller, he added.
    The MNB's international reserves can be lowered "gradually and cautiously" as Hungary's external debt, notably that of the banking sector, declines, he said. The process has already started as reserves fell by almost €4 billion, or more than 10%, in 2012, he added.