Cbank: Hungary financial system faces higher risks

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The vulnerability of Hungary’s financial system has increased over the past months, but it is still resilient in the face of external shocks, the central bank said in a report on financial stability.

“The vulnerability of the Hungarian financial system has increased due to new risk factors, but a strong ownership background (of companies) ... helps keeping it resilient,” central bank Deputy Governor Júlia Király said on Tuesday. She said uncertainty in financial markets triggered by the subprime mortgage crisis would likely persist for some time, and the bank did not expect a rapid and drastic decline in the increased risk premium demanded on Hungarian government debt. However, she said fiscal cuts to rein in the bloated budget deficit have decreased sustainability risks in the home economy. “As for 2008, we expect that only the crosswind of the tornado will reach us,” Király said. “We are not faced with the same issues as the ECB and the Federal Reverse. However, this does not mean, that our situation is that much easier.” “In our policy decisions we primarily focus on the 2009 inflation goal and any risks of missing this target. We are trying to mitigate such risks, which led to the 50 bps rate hike (to 8%) in March,” she said.

Hungary’s medium-term inflation target is 3%. The central bank hiked interest rates by a bigger-than-expected 50 basis points to defend its target in the face of persistent food and energy inflation and regulated utility price increases. Király said economic growth, which plunged to an 11-year low last year, well below that of the euro area and Hungary’s regional peers, was unlikely to pick up in the near-term due to a lack of investments and a projected slowdown in the euro zone. “The investments that would fuel a longer term growth trajectory have not been launched and the Hungarian economy is also faced with productivity problems,” Király said. She said a decline in global risk appetite also posed some liquidity issues, which warranted further improvements in the government debt market and the liquidity management methods of banks. (Reuters)

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