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Hungarian base rate may drop to 6.00% by year-end

Economic research company GKI projects the National bank of Hungary’s (MNB) base rate will fall to 6.00% by the end of 2007 from the current rate of 8.00% as inflation drops to 4.5% in December after peaking at 8.5%-9% in February-March, GKI president András Vértes announced on Monday.

GKI upped its forecast for average annual inflation to 6.5% from 5.8% forecast in December. GKI puts the forint's average exchange rate against the euro at 252 in 2007. The MNB could halt a strengthening beyond that level through rate cuts, Vértes said.

GKI CEO László Akar said he did not expect Hungary's current exchange rate mechanism to change, adding that it would not be of value to scrap the forint's intervention band if Hungary is to join the ERM II around the end of 2008 or the beginning of 2009. He warned that recent suggestions that the intervention band could be scrapped could lead to speculative trading, "which is not in the interest of the economy."


"Hungary's main economic indicators are bad but the economy is taking a turn in the right direction", said Vértes. GKI projects Hungary's GDP will expand 3% in 2007 as domestic demand will drop but industrial output will grow 9%, exports are seen to expand by 14% and imports by 11%. Vértes termed the prospects for external balances favorable.

The institute expects the country's external financing requirement, calculated as a combined balance of the C/A and the capital balances, to drop to €4 billion from €4.8 billion last year, or to 4% of GDP in 2007 from 5.4% in 2006. The C/A deficit would drop to €5 billion from €5.6 billion according to the forecast. Vértes said investments are an area of uncertainty but they could grow 4% after a 1.8% decline last year.

Among factors affecting consumption gross wages would grow 7%, net wages 3% but real wages would drop 3.5% in 2007. GKI expects the net savings ratio at 3.1% of GDP this year and gross savings at 7.5%. GKI has raised its general government deficit forecast for 2007 to 6.5% of GDP from 6%. The raised projection is still below the 6.8%-of-GDP government target. The institute projects a current-account deficit of €4 billion, or 4% of GDP. (Bloomberg)