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IMF support for tax plans “important” to stabilize forint

IMF support to the tax reforms that have been announced by the government is an important step forward towards the stabilization of the forint and the financial system, London-based investment consultants Wood & Co. said.

The company, focusing on emerging Europe, said in a report that until the full details about the public spending cuts are released, it is not possible to write off the risk of a fiscal slippage from the goal of a deficit below 3% of GDP.

However, “we also believe that should the recession prove deeper than anticipated, given the global backdrop, the IMF will step in and increase the stand-by arrangement to support the economy if necessary.”

The report quoted James Morsink, head of the IMF delegation to Hungary, saying that the tax reform plan was “welcome” as it strikes a good balance between necessary reforms and fiscal prudence.

Wood & Co. said that these developments strengthen its view of a recovery of the forint, particularly in the second half of the year, and the potential for Hungary's ERM2 entry later this year, or in 2010 at the latest.

It said that the planned VAT and excise increases could lift headline inflation by around 3 percentage points, taking it temporarily to 5%-6% early next year.

In terms of monetary policy, however, “we believe the Central Bank will continue to focus on fundamentals and financial stability and (the) inflation jump due to the VAT hike ... will not change the monetary loosening cycle.” It said it maintains the expectation of very gradual rate cuts in the near term to stabilize sentiment and support a recovery of the forint.

Juliet Sampson, Central European economist at HSBC in London, also told Econews after the tax plans were announced that in the current environment inflation “is not and should not be a primary concern.” On the contrary, there are reasons for the central bank to be concerned about the possibility of deflation, and when deflation risks are high, it is “perhaps an opportune time to impose a tax that has inflationary impact,” she added. (MTI – Econews)