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Hungary: Simor still sees inflation risk in spite of slow pickup in growth

In spite of the slow pickup in Hungary’s sluggish growth, a slowdown of inflation is expected to be drawn out and to carry upward risk, National Bank of Hungary (MNB) governor András Simor told a meeting of Parliament’s Budget Committee on Tuesday.

Simor noted that inflation expectations are high, partly because wage costs are rising faster than productivity. He attributed the slow improvement in Hungary’s growth to a slowdown in the expansion of the global economy and a slow pickup in domestic demand. Simor said that the central bank expects to meet its 3% medium-term inflation target in 2010 provided that inflation expectations are anchored. “But we see serious risks to meeting the inflation target even for 2010 if there is a further rise in oil and food prices in the world and if high expectations prevent an adjustment in wages,” he added.

The MNB has raised rates a combined 100bp since March as wage inflation and energy price rises continue to be built in to consumer prices, Simor said. He added that Hungary wants to achieve 4.2% average annual inflation in 2009, which is well over the Czech Republic’s 2.7% target, Poland’s 3.7% target and Slovakia’s 3.0% target. Simor said the MNB’s projection for the general government balance is better than earlier expected. It forecasts a deficit of 3.6% of GDP in 2008, under the government forecast of 4.0%. The bank puts the deficit at 3.3% of GDP in 2009 and at 2.9% in 2010.

Simor said the forint’s strong rate against the euro will not decrease Hungary’s competitiveness, as its trade balance has improved and the slowdown in exports is in line with the slowdown on external markets. Though monetary policy may affect exchange rates, it has no effect on the forint’s real exchange rate on the longer run, he added. Simor noted that the positive effects of high inflation on the budget are not as clear cut as earlier. As a negative effect, he pointed out higher pension payments, which are pegged to inflation.

Speaking about Hungary’s plans to adopt the euro, Simor said the NBH agrees with the government that it is too early to set a date to join the eurozone. It also backs a proposal by the prime minister to return to the question of a target date in 2009, when the effects of austerity measures introduced in 2006 can be assessed. The sooner Hungary introduces the euro the better, but introducing it too soon carries risks, he said. Simor proposed regular consultations between the Budget Committee and NBH officials. (MTI-Econews)