Járai: Convergence Program will not lead to euro adoption

Analysis

The government's present convergence program will not permit Hungary to adopt the euro, central-bank governor Zsigmond Járai said on Wednesday at a conference organized by the National Bank of Hungary on the country's past inflationary experiences.

The National Bank of Hungary previously expected Hungary to adopt the euro in 2007 or 2008, then extended the date to 2010; however it is no longer possible to tell when Hungary will be able to adopt the single European currency, Járai said. The central bank president asserted that the convergence program does not help improve the competitiveness of businesses in the country, increases tax burdens without broadening the tax base, while reducing the performance of the economy and economic growth. "Companies shouldn't calculate on the euro in their mid-term plans," Járai added.

Since Slovenia and Slovakia are close to joining the euro zone, Hungary will be in a worse position in coming years than its neighbors, he said. Járai stated that Hungary has reached a point at which bad state management has become a burden on the country's economy. The misguided economic policy and poor state administration characteristic of recent years will continue to undermine Hungary's economy for some time to come, according to Járai. The National Bank of Hungary hasn't given up its inflation target, Járai said commenting the latest Monetary Policy Council (MPC) decision that left the central bank base rate unchanged at 8.0% Monday despite its latest inflation forecasts exceeding its 3% mid-term inflation target both in 2007 and 2008.

Fighting inflation expectations is also a chief concern for the central bank, Járai said. "We need to concentrate on the secondary (inflationary) impact of the government's measures," Járai said. The central bank should use monetary policy to discourage the government's tax and utility price hikes from leading to other product and service price increases, Járai explained. The central bank wants to maintain its credibility with financial markets, and tame expectations that inflation will rise, Járai stressed. Investors and other participants in the economy should see that "if we see that the inflation environment deteriorates, the MPC will tighten (rates) so that inflation won't accelerate," Járai said. (Mti-Eco)

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