There is no reason at all for raising the central bank's 3% mid-term inflation target, National Bank of Hungary (MNB) governor András Simor said on Monday, after the Monetary Council raised the bank's key rate by 25bp to 5.50%. Simor said he hoped that the government is considering raising the inflation target to 3.5% was unfounded.
Such rumours, even if baseless, could raise inflationary expectations, he warned, noting that the cost shocks of recent years have probably anchored inflationary expectations over 3%. Raising the mid-term inflation target would be unfavourable for individuals, businesses and the state, he said. It would especially hit those with little power to represent their own interests. The inflation target is set jointly by the government and the central bank. It is reviewed in every three years. The next regular review is due in the second half of 2011.
However, a proposal by the government to have Hungary's rate-setters nominated by parliamentary committee rather than by the central bank governor can shake things up and clearly shows the government's intention to fight any views that don't match theirs. "(The proposal) ... does not serve the credibility of monetary policy", Simor reacted in a letter to National Economy Ministry György Matolcsy dated November 28 and published on the bank's website on Monday. The rules at present on nominating members of the central bank's Monetary Council are "appropriate and sufficient from every point of view," Simor said.
Simor has also written a letter to the chairman of Parliament's budget committee László Nyikos calling attention to a proposed pay rise for members of the central bank's supervisory board. Simor called the pay rise, which gives the chairman of the board a monthly HUF 1.2 million, four times the amount at present, an "anomaly". The proposal would raise the pay of the board's members to HUF 800,000 a month. Simor said the opinion of the MNB as well as the European Central Bank on the proposal should have been sought. The proposal would mean the supervisory board members are better paid than the bank's rate-setters, a difference which is not justified by their amount of work or their responsibility. Former MNB governor Zsigmond Járai was recently appointed chairman of the MNB's supervisory board.
Answering a question at a press conference on Monday, Simor said if all members of mandatory private pension funds return to the state pension pillar, bringing their assets with them, Hungary's general government could run a surplus of 5-6% of GDP in 2011. The MNB's fresh inflation report was practically closed a week earlier, thus the bank's experts assumed more than HUF 500 billion would flow into the central government from the pension fund assets, as targeted in the 2011 budget draft, Simor said. On this basis, the 2011 deficit will be well under the 3%-of-GDP target, he added. Proposals regarding the transfer of private pension fund members to the state pillar made in the last week were not taken into account when the report was put together. The government announced measures late Wednesday that would take away the state pensions of any mandatory private pension fund members that opt to remain in the private funded system rather than rejoin the state pillar.