The National Bank of Hungary sees twelve-month consumer price inflation rising close to 6.5% by year-end because of a higher VAT rate and other indirect taxes, but the rate could remain below the 3% mid-term target through 2011 because of falling consumption and a reduction of payroll taxes, the bank said in its fresh quarterly Inflation Report published on Wednesday.
The NBH raised its projection for average annual inflation in 2009 to 4.5% in the report, up from 3.7% in the previous quarterly report published in February, before the government announced additional austerity measures.
The bank said the additional austerity measures would add 1.84 percentage points to CPI in 2009 and another 2.68 percentage points in 2010. The measures are slated to take effect on July 1, 2009 and on January 1, 2010.
The inflation projection, along with the bank's forecasts for economic growth and wages, were based on assumptions the government would implement all of the announced austerity measures in full, the HUF/EUR exchange rate would remain at 295 and the price of oil would range between USD 50 and 60 per barrel.
The NBH sees inflation slowing to 4.3% in 2010 and to 1.9% in 2011, but it noted upside risk because the risk of a bigger-than-expected decline in output outweighs the downside risk of a longer-than-expected decline in bank lending.
The bank projected a general government deficit of 3.9% of GDP in 2009 and a 4.5% deficit in 2010, but said “budgetary processes in 2010 are surrounded by a considerable degree of uncertainty.”
The NBH lowered its GDP forecast for 2009 to a 6.7% contraction from a contraction of 3.5% in the previous report.
“In terms of its impact on economic activity, the procyclical behavior of both the financial sector and fiscal policy is likely to cause the current downturn to be deeper and more protracted,” the bank said.
A contraction of 0.9% was projected for 2010, but the bank sees the economy growing 3.4% in 2011. It warned, however, of downside risk resulting from a bigger-than expected decline in bank lending and a larger fall in output.
The NBH put Hungary's current-account deficit at €3.6 billion, or 4.1% of GDP in 2009. It sees the deficit narrowing to 4.0% of GDP in 2010 and to 3.3% in 2011. (MTI-ECONEWS)