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MNB raises inflation projection for 2012

The National Bank of Hungary (MNB) has raised its projection for average annual inflation in 2012 to 5.0% in its quarterly Inflation Report to be published on Thursday, MNB governor Andras Simor said on Tuesday.

The projection was raised from 4.7% in the previous report published in September.

The MNB staff assumed further interest rate rises when calculating the projection, Mr Simor said about an hour after rate-setters decided on a monetary tightening that will bring the base rate from 6.50% to 7.00%.

The MNB lowered its projection for GDP growth in 2012 to just 0.1% from 1.0% in the previous report.

The 2012 budget, approved by Parliament early Tuesday, assumes 0.5% GDP growth.

The central bank sees inflation falling to 2.6% and economic growth accelerating to 1.6% in 2013.

Mr Simor said the forecasts had been calculated taking into consideration the effect of a recent agreement between the government and banks on measures to deal with the problems of foreign currency-denominated loans and sluggish lending. The agreement could generate a rise in consumption and ease tight conditions on the lending market, he added.

In a statement published after a rate-setting meeting on Tuesday, the MNB’s Monetary Council said the level of output in Hungary would remain below its potential over the entire forecast period in the Inflation Report.

Increases in VAT and excise taxes are likely to raise CPI significantly in 2012, it said. A minimum wage increase will be counterbalanced by fiscal compensation and is "unlikely to cause considerable inflationary pressure", it added.

The Council said a weakening of the forint in recent months because of increased risk perceptions had led to a deterioration of the inflation outlook.

The weak forint is likely to make the adjustment of household balance sheets "protracted, while uncertain prospects for income growth and indirect tax increases will probably keep consumption "persistently low", it said.

Government measures to ensure the 2012 fiscal deficit target is met will probably "act as a significant brake" on growth of domestic demand, but could reduce perceptions of risk associated with Hungary, it added.

The outlook for economic growth is "unfavourable", the Council said, adding that a slowdown in global growth, contractionary fiscal policies that aim to preserve the sustainability of public debts in European and the vulnerability of the financial system point to a weak outlook for activity on Hungary’s export markets.

"Higher risk premia and increased financing risks are limiting the potential growth of the economy. In view of the significant uncertainty surrounding the outlook for global and domestic growth and financial markets, the Monetary Council considers it important that an agreement between the Government, the European Union and the International Monetary Fund is reached as soon as possible, in order to reduce financing risks," the Council said.

Hungary is seeking financial assistance from the IMF and EU as a precautionary measure that will allow the country to continue to finance itself on markets.