National Bank of Hungary sees inflation falling to 3% target in H1 2013

MNB

The National Bank of Hungary sees inflation falling to the 3% "price stability" target in the first half of 2013, governor András Simor said on Tuesday, revealing one of the main figures of the central bank's quarterly Inflation Report to be published on Thursday.

In the previous report, the MNB said CPI could fall to the 3% target by the end of 2012.

The MNB projects average annual inflation of 3.9 in 2011, unchanged from the forecast in the previous report. It raised the projection for 2012 from 3.6% to 3.9%.

The MNB lowered its GDP projection for 2011 from 2.6% to 1.6%. It lowered the projection for 2012 from 2.7% to 1.5%.

The central bank's Monetary Council said in a statement after a meeting at which they discussed the Inflation Report that inflation "may fall back to 3% by the beginning of 2013 as the effects of cost shocks and increases in indirect taxes wear off".

Economic growth is "likely to remain subdued" over the next two years, the Council said, adding that upside risks had fallen because of weak domestic demand.

Higher commodity and fuel prices in the first half of 2011 have fed through to core inflation, and increases in VAT and excise duties are likely to raise CPI "considerably" for a short period, but inflationary pressure from the demand side continues to be "extremely low".

The Council said the outlook for Hungarian growth had "deteriorated significantly" in the past quarter. Low personal income tax and payments of yields on private pension fund assets are unlikely to boost household consumption because of the "high degree of uncertainty" surrounding the outlook for incomes and high levels of debt, it said. Investment activity is likely to be "extremely subdued" because of uncertainty in the business climate, tightening credit conditions and a worsening outlook for business activity, it added.

The slowdown in global growth and the prolonged problems of the European banking sector point to a worsening environment in Hungary's export markets, which could weigh on domestic export growth, but big investments, mainly in the automotive industry, could partly offset this effect, the Council said.

"There is a risk that the program will cause a major setback in the domestic banking sector's ability to lend, and companies' reduced access to bank credit may lead to a further deterioration in the outlook for Hungarian growth," the Council said.

Under the early repayment scheme, approved by Parliament late Monday, troubled borrowers can make a full repayment at 180 forints to the Swiss franc, 250 forints to the euro and 2 forints to the Japanese yen, unless the rate of the forint was not higher at the time of taking out the loan. The law gives borrowers until December 30, 2011 to indicate their participation in the program.

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