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Planned tax increases to have little mid-term impact on inflation

The government's planned VAT and excise duty increases are unlikely to have a major effect on inflation over the Hungarian Central Bank’s (MNB) horizon, given the narrow demand in Hungary's recession-stricken economy, MNB governor András Simor said.

Although the tax measures if they materialize could temporarily deviate inflation from the bank's mid-term target (of 3%), the MNB expects inflation around the target over the one-and-half year horizon, Simor told a press conference on Monday.

Simor spoke after Hungary's new Prime Minister on Sunday announced his crisis-management program, which includes planned measures to raise the standard VAT rate from 20% to 25% as well increases in various excise duties.

The program did not influence the Monetary Council's Monday rate-decision, according to Simor, who answered a flat 'yes' to the question regarding whether the Monetary Council would have made the same decision had details of the program not been announced. Actually little details have yet been announced, he noted.

Earlier on Monday, the MNB Monetary Council decided at a regular rate-setting meeting to keep the bank's base rate on hold at 9.50%.

Speaking about the considerations behind the Council's Monday decision, Simor noted inflation in market services has slowed significantly. Last year, this segment failed to respond to monetary tightening measures, the MNB governor added.

Wage pressure has also subsided. Up to the end of last year, labor market adjustment was reflected in shrinking premiums, while now it has manifested itself in a drop in the rate of wage growth as well, Simor said. The number of employees has been dropping faster than expected this year. Business wage costs are still not low enough to prevent a further decline in profits, Simor said, forecasting a continuation of the new trend.

Hungary's GDP will contract to a greater degree than the bank forecast in its February inflation report, Simor said. Deeper global recession, the limited lending of banks and, over the short-term, the effects of the government's fiscal tightening are the factors behind the bigger contraction. The MNB will make a formal new forecast only in its new report due by the end of May.

Placing Hungary on a path of decreasing debt would be extremely important as a means of restoring the confidence of investors, Simor said, adding that a convincing improvement will happen only if Hungary returns to higher potential growth rate as well.

The current low activity rate is a main obstacle to growth, Simor said. Many measures contained in the new government program - such as the changes planned to the pension and social-support system - represent important reforms, the MNB governor said in response to questions. (MTI – Econews)