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Central bank rate rise provides stability till IMF-EU agreement reached, says governor

A decision by the National Bank of Hungary on Tuesday to raise the central bank’s key rate by 50bp will stabilise financial markets until Hungary reaches an agreement with the International Monetary Fund and the European Union, MNB governor Andras Simor said at a conference on Thursday.

Hungary is in dire need of the IMF-EU agreement, Mr Simor said at the conference organised by economic research institute GKI. There can be no reduction in state debt without investor confidence, he added.

Hungary’s government said in mid-November that it is seeking financial assistance from the IMF and EU as a precautionary measure.

Mr Simor said the policy of basing growth on foreign resources would not work in the future, mainly because of Hungary’s accrued stock of foreign currency-denominated debt. Growth must be financed rather from domestic savings, perhaps for several years, as the stock of debt is reduced, he added, noting that this meant Hungary must again take a net savings position.

Hungary’s current account surplus and fiscal balance, or possible surplus, will not in and of themselves reduce the country’s state debt as a proportion of GDP, he said. GDP has to grow too, otherwise debt will continue to increase, he explained.

If the forint weakens and real interest rates climb, state debt will grow too, he added.

For these reasons, real interest rates must be reduced, growth accelerated and the forint’s exchange rate stabilised, he said. It is not enough to keep fiscal processes and the current account balance in check, he added.

The sustainability of state debt is not just a mathematical question, but one of confidence, Mr Simor said.