Hungary’s central bank will defend its currency if its fall threatens its goals of inflation and financial stability, and said that the steps it has taken to calm markets need time to take hold.
Deputy Governor Ferenc Karvalits said the forint currency, which has tumbled 16% against the euro this month due to investor fear over Hungary’s ability to keep the foreign cash crucial to its economy flowing in, was oversold. “If you look at the current exchange rate level, the recent sharp devaluation of the Hungarian currency, the forint, is fundamentally unjustified,” Karvalits told the Reuters Central European Investment Summit on Tuesday.
“We are ready to defend the currency if its weakness puts the central bank’s inflation goal or financial stability goals at risk.” He did not give an exchange rate he saw as appropriate for the forint. His comments came after central bank (MNB) governor András Simor said earlier in the day that the bank had not yet seen it justified to step in.
Karvalits said the seized-up bond market was Hungary’s biggest problem, but measures introduced last week to buy back state bonds to jump-start trading, and other steps to revitalize the foreign currency swaps market, should slowly take hold. “You have to give some time to the market to absorb these changes. We just announced the measures, and we just started auctions... it takes a bit time.”
EVALUATING DAY BY DAY
Karvalits said the government had committed to squeeze the budget deficit smaller than already large reductions and potentially introduce spending caps and increase the size of emergency reserves.
Hungary plans to cut its budget deficit from over 9% of GDP in 2006 to 3.4% this year and 2.9% this year. But the deficit remains one of the biggest in the European Union and analysts say that heavy reliance on external financing makes it one of the bloc’s most vulnerable economies.
He said the effect on Hungary’s economy due to the slowdown in Europe and higher financing costs that has squeezed the trade deficit and would help cut Hungary’s external financing requirement of 4.0-4.5% of gross domestic product. “As a consequence, Hungary’s external financing requirement is likely to decrease to 3% of GDP in 2009,” he said.
Karvalits did not give an indication as to future interest rate policy -- the central bank left interest rates unchanged at 8.5% on Monday -- but said the bank’s quarterly inflation report in November would give it better guidance. “You can formulate a medium term strategy for yourself, but you have to evaluate day by day, based upon the new information you receive because the conditions are so volatile,” he said.
He said Hungarian officials were close to agreeing a deal for potential financial aid from the International Monetary Fund, which along with the European Central Bank has offered to lend a hand to Hungary although Budapest has said it would use the help only as a last resort. “We don’t have a date for it. It’s in the near future,” he said. He added that the global slowdown would significantly undercut inflation and bring it to the central bank’s 3% target by 2010.
That, combined with the government’s efforts to trim the budget deficit to under the euro zone limit of 3%, would mean Hungary would be technically ready to join the ERM-2 euro zone waiting room next year. “The formal level will be there, the question is whether the whole institutional framework will be ready to make such a decision,” he said. “We would like to fulfill the conditions and get (into the euro zone) as soon as possible.” (Reuters)