Hungary’s economic growth set to pick up, currency losses increase inflation risk

Policy makers, who will meet next week to decide interest rates, must consider the rise of the risk premium on Hungarian assets, Simor said in an interview published in today’s issue of the weekly HVG. Even as the forint weakens, the bank hasn’t intervened to strengthen the currency, he said. The forint lost 4% against the euro in the past month along with other east European currencies as investors sold risky emerging-market assets during a global credit crunch.

The weaker currency may stifle the bank’s efforts to tame the EU’s second-fastest inflation. „The effects of the rising risk premium will cause the most headaches for monetary policy in the near future,” Simor said. „It’s unlikely that the premiums would return to the previous low levels within a short period.” Hungarian inflation is set to slow the rest of the year after the effects of higher utility bills and a raised tax begin to wane after initially causing the rate to quadruple.

Central bankers in June cut the rate by a quarter of a percentage point to 7.75%, the EU’s highest, the first reduction since 2005. Simor said wage increases are leveling out and are a decreasing risk to inflation and that so-called trend inflation - the measure stripped of energy prices, food costs and tax effects - continues to decline. The bank aims to cut the consumer-price index to 3% within two years from 8.4% in July. He reiterated that lifting the forint’s trading limits is not on the agenda because the government doesn’t agree with the central bank’s push for it.

Hungary’s economic growth, the second- slowest in the EU, will quicken the rest of the year as exports continue to rise, Finance Minister János Veres said. The government is keeping its 2.2% forecast for this year’s annual economic growth rate, even after the statistics office last week said second-quarter expansion was 1.4%, the slowest in almost 11 years, Veres said on public television. The government’s efforts to curb the EU’s widest budget gap crimped household consumption and put the brakes on growth as other east European nations expand.

Exports are set to rise further, while domestic demand will rebound, Veres said. „This was the bottom; only higher growth data will arrive in the coming quarters,” Veres said today, according to a clip posted on the television Web site. „The reason we think growth obviously won’t be slower than this is that exports will continue to expand quickly and domestic consumption won’t slow as much as we planned.” (Bg, GR, Mti)