Hungary’s central bank (NBH) is strongly committed to its inflation target and will need to tighten policy if prolonged weakness of the forint threatens that target, rate setter Gábor Oblath said on Tuesday.
The bank floated the forint last week, abandoning its 30% wide trading band against the euro, at a time of stress in global markets. Its failure to accompany that with a rate rise has been criticized by some economists, who say the bank’s inflation-fighting credibility has been hurt, but Oblath said the NBH was “strongly committed” to meeting its average annual 3% target for consumer price inflation in 2009. “If a lasting exchange rate weakness endangers meeting the inflation goal, it’s clear that monetary policy will have to react,” he said in a written response to emailed questions. Oblath said the bank had time to observe the impacts of the forint float until its next rate-setting meeting on March 31.
When asked whether the bank needed intervention so as to prop up the forint, he said: “There is no need for intervention in the forint market. As for verbal intervention, this interview is something like that.” The forint firmed 0.3% after Oblath’s first comments to 262.20 from 263.00 against the euro, before retreating to 262.60 by 1411 GMT.
No deal on rates
The rate setter denied interpretations that the bank kept its 7.5% base rate on hold last week in exchange, for which the government agreed to scrap the forint band. “The majority in the Monetary Council had reason to decide on waiting, especially as some developments in the recent past, for example non-regular wage payments and inflation trends in market services, showed promising signs concerning disinflation,” he said. Oblath said he also wanted to see the impacts of the forint float, adding, however, that imported inflation and prolonged forint weakness would remain threats. “I believe that abandoning the band has strengthened the bases of the NBH’s credibility... And monetary policy in the period ahead of us will clearly show the market that we are committed to meet the 3% target,” he said. He declined to estimate forint levels which would be already tolerable for the bank which last week lifted its forecast for average inflation in 2009 to 3.6% from 3.0%.
Oblath said the inflation cutting impacts of a drastic slowdown in Hungary’s economic growth to an 11-year low of 0.8% in the last quarter of 2007 would appear only with a significant delay, though some signs like a rise in unemployment had already arrived. He added that interest rate levels had hardly any impact on economic growth in Hungary, while high and fluctuating inflation and uncertainty over prices can have a strong damaging impact. “Of course in certain situations the interests of cutting inflation and of economic growth can clash,” the rate setter said. “But I would like to underline very firmly: even considering the possible short-term conflicts, the central bank is strongly committed to meet the inflation target; I, myself, am strongly committed, too.”
The rumor, that the central bank is ready to give up its 2009 inflation target of 3% is ridiculous and unfounded, said National Bank of Hungary governor András Simor, responding to rumors spreading among money market brokers. Reacting to the news, securities market yields climbed; the three year government securities yield was near 9% on Thursday afternoon. (Reuters, MTI-Econews)