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UPDATE - National Bank of Hungary lowers GDP, raises CPI projections for 2012

The National Bank of Hungary (MNB) has lowered its projection for GDP growth in 2012 from 1.5% to 1% and raised its projection for average annual inflation from 3.9% to 4.7%, taking into account the 2012 budget draft, the central bank said on Thursday.

The projections were changed from ones announced on Tuesday by MNB governor András Simor after a meeting of the Monetary Council. In line with the usual practice, Simor revealed the main projections in the central bank's quarterly Inflation Report published two days later; however, the National Economy Ministry did not publish a proposal by the National Economy and Society Council (NGTT) to raise the basic minimum wage by 18% and the minimum wage for qualified workers by 15% until early in the evening on Tuesday.

The government targets 1.5% GDP growth and 4.2% average annual inflation in the 2012 budget draft.

The GDP growth and average annual inflation projections for 2011 remain unchanged at 1.6% and 3.9%, respectively, in the Inflation Report, the central bank said.

A planned increase in the VAT rate from 25% to 27% could add 1.3 percentage points to CPI, but of this just 0.8% is expected to pass through, the MNB calculated.

The MNB sees the general government with an accrual-based surplus 1.9% of GDP in 2011, but it projects a deficit of 3.4% for 2012, under the 3.7% projected before taking into account the 2012 budget draft.

The projection is over the government's 2.5% target, however the MNB is not taking into account the HUF 150bn in revenue from the VAT increase or the establishment of the National Protection Fund on the deficit until the government finalizes the measures.

"The report assumed an exchange rate of 275 forints to the euro and calculates that the forint will stabilize after a course of tangible depreciation in the short term," MNB chief analyst Barnabás Virág said on Thursday.

The 275 rate is the 30-day average before the publication of the report.

When the central bank's staff started preparing the Inflation Report in mid-August, it appeared that inflation would reach the 3% "price stability" target by the end of 2012, but new information revealed since then required a "full rewrite" of the analysis closed on September 13, Virág said. The new projection is for inflation to reach the 3% target at the beginning or in the first half of 2013, he added.

The MNB projects household consumption will edge down 0.1% in 2012 while investments increase 0.8%.

It sees nominal wages in the private sector climbing 6.2%.

The central bank projects employment will grow just 0.1% next year, following a 0.9% increase in 2011.

The report puts 2012 export growth at 8.5% and import growth at 7.1%.

The MNB sees Hungary's current account surplus reaching 4.2% of GDP in 2012. The country's net external financing capacity is expected to reach 6.8% of GDP.