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Simor: Central bank must exercise caution when cutting rates

  The National Bank of Hungary must continue to exercise caution with rate cuts, because an accelerated reduction would threaten the country’s financial stability, central bank governor András Simor told a meeting of Parliament’s Budget Committee on Wednesday.

A cautious rate policy is also important because foreign investors do not place Hungary in the same category as other EU countries, but together with countries such as Mexico, Brazil and the Philippines, Simor said. While Hungary’s risk premium is currently 350bp, Poland’s is just 200bp, he added.

Consumer price inflation is likely to fall under the MNB’s 3.0% mid-term “price stability” target during the year even without any change in the current monetary conditions, he added. Hungary’s economy could contract even more in 2009 than the 2.5% projected by analysts, Simor said.

The MNB will publish new projections for 2009 in its Inflation Report update at the end of February. In its previous quarterly projection, published in November, the MNB forecast a 1.7% economic contraction in a pessimistic scenario.

Simor said the MNB has no exchange rate target, but it does watch the forint’s exchange rate, mainly to see financial stability continues. The stock of retail foreign currency-denominated loans in Hungary is bigger than in other neighboring countries, he added. (MTI-Econews)