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MNB puts inflation over mid-term target even at edge of forecast horizon

The National Bank of Hungary sees consumer price inflation remaining over the 3% mid-term "price stability" target till Q4 2012, the edge of its forecast horizon, because of rising domestic demand, the central bank said in its fresh Quarterly Report on Inflation published on Wednesday.

The MNB projects CPI will reach 4.4% in Q4 2010, 4.5% in Q1 2011 and 3.1% in Q1 2012, before picking up again. The bank raised its projection for annual inflation in 2010 to 4.9% for 4.7% and it raised the projection for 2011 to 4.0% from 3.5% in the previous report, but it lowered the forecast for 2012 to 3.3% from 3.4%.

As well as rising domestic demand, the MNB said it revised its inflation projections because of ad hoc sector specific taxes, expected slow wage growth and a stronger forint. The passthrough of higher unprocessed food prices, the passing on of the cost of the ad hoc taxes and the increase in household consumption will create inflationary pressure in the short term, though this will be partially offset by slower wage growth, the bank explained.

The MNB sees the gross average wage rising 2.0% in 2010, 2.2% in 2011 and 5.7% in 2012. The bank put the HUF/EUR cross rate at 275.0 in 2010, stronger than the 277.6 rate in the August report. It changed its projection for the rate in 2011-2012 to 274.5 from 283.8.

The biggest risk to the inflation outlook is that inflation expectations will become anchored at levels over the mid-term target, the MNB said. If this happens — and surveys show there are signs of it beginning to happen already — the inflation path could rise by a full percentage point, the bank added.

The MNB said domestic demand was likely to pick up from 2011 because of big automotive industry investments and growing household consumption, supported by lower taxes and falling unemployment. But households with foreign currency-denominated debt taken on before the crisis "may continue to imply strong pressure to adjust balance sheets". The effect of changes to the private pension fund scheme are "unpredictable", thus a change in consumption or saving behaviour is not expected in the baseline projection, the bank added.

Recently introduced "crisis taxes" on the telecommunications, energy, retail and banking sectors "increase investor uncertainty" and could prompt companies to change their investment plans, the MNB said. Tight corporate lending conditions could offset most of the positive impact on growth of the big automotive industry investments, it added.

The MNB raised its GDP growth forecasts for 2010 to 1.1% from 0.9%, for 2011 to 3.1% from 2.8% and for 2012 to 4.0% from 3.8%.

Rising external demand and export growth spurred by the big automotive industry investments could counteract higher domestic demand and keep Hungary's external financing capacity positive for the entire forecast period, the MNB said. It put Hungary's external financing capacity at 3.4% of GDP in 2010 and 2.6% in 2011.

The MNB raise its projections for Hungary's current account balances to surpluses of 1.3% of GDP in 2010 and 0.3% in 2011.

The MNB said the crisis taxes and the re-channelling of assets in private pension funds to the central budget were likely to ensure the general government deficit is lower than previously expected during the forecast period. But the improvement in the balance can only be maintained if the government makes structural changes on the expenditure side, it said.

The MNB put the general government deficit, calculated with EU accounting rules, at 3.8% of GDP in 2010, 2.7% in 2011 and 3.1% in 2012. (MTI-ECONEWS)