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National Bank cuts growth forecast to 2.6%

Hungary's GDP growth will probably be slower this year than previously forecast as a result of lower-than-expected external demand and an anticipated slow-down in domestic demand stemming from the government's fiscal measures, National Bank of Hungary (MNB) governor András Simor said on Friday.

In its quarterly inflation report published on June 22, the MNB cut its forecast for GDP growth in 2011 to 2.6% from 2.9%. The bank also lowered its growth projection for 2012 to 2.7% from 3%.

Simor said the MNB anticipates rising investment volumes beginning only next year, adding that it expects unemployment rate to remain above 10% in 2012.

With regard to the government's measures aimed at raising gross wages to compensate for losses resulting from its tax reforms, Simor believes that it could seriously hinder the demand for employment on the market, because businesses would have larger employment-related costs and could therefore decide to employ fewer people.

The MNB governor added that demand should be raised for unskilled and low-wage workers. Simor noted that MNB is unable to produce figures of the decision's effects, because its exact measures are not yet known.

Simor said the Greek credit crisis has had no effect in the region. Although the Greek parliament approved austerity measures on Wednesday, it is not the end of the problem, "it will be a strained situation, markets are nervous," he said, adding that Hungary's fundamental condition has undergone significant improvement recently.

Since the government announced fiscal measures early this year, there has been an improvement in the country's risk assessments. There is still a major difference between the region and Hungary, but this will narrow as soon as the government carries out the planned measures, Simor said.

Simor said there are contrary forces acting upon inflation. There are shocks on one side, for example the price of crude oil or raw material. These have significant short-term effects, so inflation could stay above (the MNB medium term goal of) 3%, Simor said.

On the other side, employment growth is still scarce so demand would stagnate, pushing inflation down in the long term. These could result in inflation slumping near the 3% target by the end of 2012, so the requirement for the target is to keep the base rate at the present 6%, Simor said.