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IMF says Hungarian central bank could make gradual rate cuts

The International Monetary Fund (IMF) believes that recent rate cuts by Hungary's central bank (MNB) have been appropriate, reflecting the fall in projected inflation and the stability of the exchange rate, James Morsink, head of an IMF's delegation to Hungary said at a press conference in Budapest.

Morsink said that the proposed 2009 budget is likely to enable the government to meet its deficit target for next year, adding that the 2008 deficit target of 3.4% of GDP is also likely to be reached. Morsink added that the decline in the deficit is likely to help stabilize Hungary's general government debt as well.

“We see room for further rate cuts, which should be gradual and cautions and in line with the economic progress the government defined,” he said.

However, in a response to a question he cautioned that "an immediate cut in interest to 6% would not be a wise step."

The IMF-delegation has been on a one-week visit to Hungary as part of a regular review. The IMF, the European Union and the World Bank granted Hungary a financial package of €20 billion in October.

Finance Ministry state secretary Álmos Kovács said at the press conference that lack of liquidity, the weakening of the forint and Hungary's high level of foreign-currency debt at the beginning of October made the IMF-EU-World Bank financial package necessary. Kovács noted that the government had already drawn upon €4.9 billion of the International Monetary Fund's €12.5 billion contribution to the package and €2 billion of the European Union's €6.5 billion contribution.

The MNB didn't call government bond buyback tenders this week and last week because there's sufficient liquidity in the foreign exchange and Hungarian forint markets, the central bank's deputy governor Ferenc Karvalits said at the press conference. “The liquidity strain has eased. Both forint and foreign currency liquidity is sufficient so there was no need for the auctions,” Karvalits said.

Morsink commented that the condition of Hungary's financial markets has improved since October, though that these markets remain under pressure. Morsink added that forint rates have largely stabilized, while government-bond yields have declined and parent banks are providing continual support for their Hungarian subsidiaries. The IMF official predicted that Hungary's external financing requirement would remain a problem in 2009 and could even deteriorate during the year.

Morsink said that evidence of economic recession has become apparent in Hungary, noting that the country's GDP growth declined already in the third quarter of this year and is expected to continue to decelerate in the Q4 before contracting in 2009.

Morsink stated that the parliament's expected adoption on Monday of a law providing Hungarian banks with loan guarantees and the possibilities to raise capital represents a positive development.

The leader of the IMF delegation in Budapest remarked that a bigger-than-previously-expected decrease of inflation warrants a continuation of cautious interest policies on the part of the MNB. (MTI – Econews)