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Hungary flirts with stagflation as growth stalls - extended

Hungary’s economic growth slowed again in the Q4 of 2007 to just 0.8% year-on-year and while inflation moderated in January, it remains high, posing a dilemma for the central bank.

Data released by the Central Statistics Office on Thursday showed economic growth dropped from 0.9% in the Q3 and for all of 2007 it was just 1.3%, a third of the level of 2006 as tax and price hikes took a grip. Headline inflation in January was 7.1% year-on-year, in line with analyst forecasts, and was lower than the 7.4% seen in December. “This morning we got more evidence that the Hungarian economy is sliding into a stagflation -- high inflation and very low growth,” said Lars Christensen, economist at Danske Bank. The weak growth figures will help the doves in the central bank, which meets on Feb. 25 to decide on interest rates, while the risk of sustained inflation -- some price rises have still to come through -- will bolster the hawks. “The January data do not yet contain the impact of the electricity and gas price hikes, this will appear in the February numbers,” said Borbála Minary, a statistician at the KSH. Many investment banks have started to bet that Hungary will have to start raising interest rates to counter persistent inflation and a weak forint and will do so on Feb. 25 when it presents its new economic forecasts. Daniel Bebesy, an analyst at Budapest Fund Management, believes the key medium-term inflation forecast, for 2009, will be raised to 4.0% from 3.0%.

Weaker than peers, and getting worse
While Hungary wallowed close to recession, neighboring Slovakia posted economic growth of 14.1% in the Q4 and 10.3% for the full year. Hungarian Finance Minister János Veres, stung by comparisons with what was once the country’s much poorer neighbor, said on Thursday that Hungary would start to narrow the gap and noted that Slovakia’s strong growth had its costs. “How did Slovakia form the basis of that (strong growth)? They cut social spending roughly by half ... Those, who mention Slovakia as an example should say that too,” he told state television MTV. After the figures came out, Veres told the national news agency MTI that he saw no reason to change the government's forecast for 2.8% economic growth this year. “Growth in the business sector is all right,” he said.

While it is true Hungary has acted decisively to cut its budget deficit, which hit 9.2% of GDP in 2006 and will fall to 4.0% this year, the government says, it hasn’t tackled overspending and so remains uncompetitive. Until the turmoil on global markets hit the forint, expectations had been that the central bank would be able to cut interest rates by as much as 100 basis points this year, but now many investors are betting on rate hikes of a similar magnitude. Key to whether the central bank will hold or raise is likely to be the forint, which was trading at 261.00 to the euro at 0857 GMT, far stronger, than the lows of 267.35 over the past two weeks.

Economists believe that the central bank, which denies it has an exchange rate target, starts getting worried about the effects of a weak forint on inflation at levels weaker, than 260 to the euro. “From a monetary policy point of view, the GDP figure alongside with calmer markets could support the doves within the council, and could be an argument not to raise the base rate next week,” said Mariann Trippon at CIB Bank. Zoltán Török at Raiffeisen argued that while inflation pressures would remain considerable the bank would not hike, “especially as the deplorable GDP data works massively against a rate hike in many dovish monetary council members’ mind set.” (Reuters)