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Current inflation does not justify 11.00% base rate, Simor says

  The present rate of inflation in Hungary does not warrant keeping the base rate at its current level of 11.00%, central bank (MNB) governor András Simor said at a meeting of the Hungarian Association of Industrialists and Employers (MGYOSZ) on Wednesday.

 

Simor added that the MNB would cut rates at a pace and to a degree that the market could sustain, though would not drag out the process. The central bank’s recent 50-basis-point cut, though risky, proved to be effective, Simor said, adding that further rate cuts depend on the stability of the economy, which had improved considerably since the recent reduction in key-interest rate. Simor commented that “forint rates breaking out of their established channels” would have caused unbelievable damage to the Hungarian economy, both to companies and citizens.

The MNB governor said that Hungary’s budget deficit could drop below 3% of the GDP in 2008 if the government does not overspend during the final weeks of the year. The government expected a deficit of 3.4% for 2008. Simor said the MNB will take steps in the coming weeks to further improve the liquidity of banks in Hungary. The central bank governor added that in this transition period only the increasing savings can increase banks’ willingness to lend.

Simor said the MNB can not affect the lending policy of banks. Simor said the government’s economic-adjustment measures could have placed a burden on the social system instead the economy. Simor added that the government’s decision caused economic growth to slow, resulted in increased debt and decreased savings. Therefore the current economic crisis has had a magnified effect on Hungary, as it has other countries with a high degree of debt, the central bank governor added.

Simor said that the initial favorable results of the decisions that the MNB has made in connection to the crisis can now be seen, stabilizing the government-securities and the foreign currency/HUF swaps markets. Simor added that raising the central bank base rate by 300bp in October was primarily an intuitive measure. Simor added that while the term “banking sector bailout” is not appropriate, to carry out such a measure is necessary since other countries have enacted such measures and not to do so would put Hungarian banks at a competitive disadvantage.

The central bank governor said banks in Hungary do not need such package, since they have a sufficient capital adequacy ratio, but without a bailout package their international competitiveness would deteriorate. Simor added that current conditions should not restrict the authority of banks, but should provide the state with veto rights.

Simor said €20 billion EU-IMF-World Bank loan can only serve to stabilize Hungary’s economy over the short term, adding that the economy would still lag behind over the long run without reforms. (MTI-Eco)