Hungary Fiscal Challenges, Risk May Delay Rate Cut, MNB Says
Hungary’s fiscal challenges and economic vulnerability may prompt policy makers to “only gradually” adjust monetary conditions to worse-than-forecast growth and easing inflation, the central bank said.
The bank’s September inflation forecast, the government’s budget steps and global economic management may influence Hungary’s rate path, according to the minutes of its August rate-setting meeting posted on the central bank’s website today.
“Potential difficulties in achieving the government’s fiscal policy objectives might also require that monetary conditions be adjusted only gradually to the slower recovery in the economy and the reduction in inflationary pressure,” the minutes said.
Hungarian Prime Minister Viktor Orban announced yesterday measures to erase part of a $1.8 billion budget hole, pledging to cut next year’s deficit to below 3 percent of economic output and reduce debt. Hungary will raise excise duties, halt public procurements and collect more value-added tax to partially cover this year’s budget gap.
The deficit resulted from lower-than-forecast economic growth and a European Union ruling forcing Hungary to repay about 250 billion forint ($1.27 billion) in VAT to companies.
Hungary originally targeted a budget shortfall of 2.94 percent of gross domestic product this year, before the effective nationalization of private pension funds, which would swing the budget into a surplus.
Last year, the government posted a deficit of 4.3 percent of GDP, missing its 3.8 percent target. The goal for 2012 is a shortfall of 2.5 percent.
The government lowered its 2011 growth forecast to 2 percent from 3.1 percent and sees the same figure in 2012, Economy Minister Gyorgy Matolcsy said yesterday.
The Magyar Nemzeti Bank left its benchmark interest rate unchanged at 6 percent for a seventh month in August as Europe’s sovereign debt crisis weakened the forint and increased the country’s credit risk.
“Members of the Monetary Council agreed that Hungary continued to be among the countries vulnerable to crises and therefore a deterioration in sentiment had an amplified impact on risk premia on forint assets,” the minutes said.
The forint strengthened 0.3 percent to 276.7 per euro as of 2:49 p.m. in Budapest, paring its decline this quarter to 3.9 percent. Five-year credit-default swaps insuring against a default on Hungary’s debt traded at 421.6 basis points, compared with a low of 237 basis points in March.
Shift in Sentiment
Policy makers agreed that it was necessary to maintain the base rate as Hungary was “particularly affected” by shifts in investor sentiment, the minutes said. “Increased perceptions of the risks associated with forint assets might continue to limit the room for maneuver in interest rate policy.”
The council agreed that Hungary’s growth outlook “significantly deteriorated,” with several members arguing that the country might be facing a sustained decline in demand and stagnating economic performance.
GDP was unchanged from the first quarter, the statistics office said in a preliminary report on Aug. 16. The final data will be published tomorrow. The economy expanded 1.5 percent from a year earlier, compared with 2.5 percent in the first quarter.
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