City: CPI target unchanged, rising risk of PM Gyurcsány’s early departure


Hungary’s CPI target is unlikely to be revised up, if anything, a downward revision would make more sense, according to a report released by a City-based forecasting think-tank. Other London-based analysts see a rising risk of Prime Minister Ferenc Gyurcsány departing before year-end. 

4cast said in its latest monetary opinion on Hungary that the August review of the CPI target “seems to have caused some worries” on markets, especially after both Finance Minister János Veres and MNB Governor András Simor said they would not be “dogmatic” about the issue. “Several of our market contacts have started to ponder whether the MoF and the MNB are preparing the ground to raise the current 3% CPI target ... we do not think there are risks of a change to the status quo”.

4cast said that lifting the CPI target would bring no advantage to either sides: the MNB will lose its credibility and the MoF will have to foot an even higher bill on public debt as the gains from a potential drop in short term rates would be far more offset by the extra costs of a rise in long term rates. Markets have anyway long been accepting Hungary’s regular overshooting of its CPI target - the same goes to the European Central Bank - and the MoF also knows that there is some flexibility implied in the target in the case of external shocks. There is no need to raise the target to get additional puffers, these puffers exist anyway, 4cast explained. If Hungary is serious about getting into the euro zone, it will have to lower its CPI target and move it closer to the ECB’s sub-2% rate, the same way Slovakia did in the run up years to entry, it added.

Prime Minister Ferenc Gyurcsány, “who remains The Decision Maker in the cabinet”, has never been openly critical to the policies of the central bank. MNB will arguably not want a higher target rate and Gyurcsány is unlikely to press against the plans of the central bank, 4cast said.

According to a separate report released on Thursday, however, Gyurcsány may not be around as a political leader for much longer.

Dresdner Kleinwort said that since the break-up of the ruling coalition, Gyurcsány has stressed that the minority government can carry on with business as usual and has reaffirmed the intention and ability to achieve the promised fiscal targets. However, “we believe the political backdrop has continued to deteriorate and the probability of the departure of Prime Minister Gyurcsány already this year has significantly increased”.

Prolonged weak growth and very low popular support imply the Socialist party is now likely to prefer “a visibly more populist candidate”, it added. Of the possible replacements, economy minister Gordon Bajnai is the most market-friendly option because of his reputation for focusing on change, rather than day-to-day politics, Dresdner said. At the opposite end of the spectrum, Parliament Speaker Katalin Szili is one of the most popular socialist politicians at the moment; she is an outspoken opponent of Gyurcsány and “would be the most populist among (the potential) candidates”, Dresdner Kleinwort said. (MTI-Econews)

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