Hungary's central bank must raise the benchmark interest rate as inflation accelerates, said György Surányi, a former president of the bank and a possible candidate to lead it again.
„Amid the forceful increase of the headline and core inflation rates, the central bank should even increase rates using its own logic during late 2006 and early 2007, ” Surányi said in an article published in the January 20 edition of Népszabadság. Surányi, who headed the bank in 1990-91 and 1995-2001, said it „inexplicably and harmfully” loosened monetary policy in the first half of last year after previously tightening it „overly' and also „harmfully.”
The inflation rate rose to 6.5% last month, the highest since September 2004. The central bank will probably keep the benchmark two-week deposit rate at 8% today, according to all 13 economists surveyed by Bloomberg, after five increases from 6% between June and October. Previously, the rate fell from 12.5% in March 2004.
The bank will announce its decision at 1 p.m. in Budapest. „The bank did nothing between January and June, except for criticizing budget policy,” Surányi said. „The bank leaned back while watching the dramatic loosening of monetary conditions, while the forceful acceleration of inflation within 18-24 months was obvious.” Keeping rates too high before last year contributed to increasing the budget deficit, while the low inflation rates the bank achieved were „unsustainable,” he said. Failing to raise rates earlier eroded the credibility of monetary policy, he said.
„The new leadership has to start building credibility and creating the conditions of real price stability from scratch after the changing of the guard in March,” Surányi wrote. State-controlled news agency Mti on January 9 listed Surányi among the candidates to succeed President Zsigmond Járai, whose term expires in March. Other possible nominees included András Simor, head of the local Deloitte Touche Tohmatsu unit, István Hamecz, the central bank's chief economist and Ferenc Karvalits, chairman of mortgage lender FHB Nyrt.
The „disproportionate” monetary tightening before last year contributed to a wider budget deficit by raising the government's interest expenses, increasing consumer spending power through keeping the currency strong and by eroding the country's external balances, Surányi wrote. „Practically every important element of economic policy between 2001 and 2006” was „gravely erroneous, irresponsible and deeply contrary to the country's interests,” Surányi said. „Monetary policy also „deteriorated the state of the budget and external balances.”
Government policies contributed helped cap inflation at the slowest pace in more than 30 years last year, Surányi said. State-subsidized energy and drug prices helped keep costs low, while inflating the deficit, he said. That stoke inflationary pressure. „Temporary price stability was the result of a gravely faulty budget policy and a misguided monetary policy, based on illusions,” Surányi wrote. „Lower inflation was created largely at the cost of accumulating tension in other aspects of the economy and not amid natural, organically improving balances.”
While the central bank should continue treating price stability as a priority, it has to work with the government, employers and employees to create the necessary conditions, Surányi said. Without treating other pressures in the economy, shooting for price stability becomes „self-serving,” he said. (Bloomberg)