Hungary Central Bank Cuts Budget Forecast Under Matolcsy

Hungary’s central bank, under the direction of new president Gyorgy Matolcsy, reduced its budget deficit forecast to below the European Union limit, aligning it with government plans and putting it at odds with the European Commission and the International Monetary Fund.

The fiscal gap will amount to 2.9 percent of gross domestic product this year and next, according to the Magyar Nemzeti Bank’s quarterly forecasts published today. The previous forecast was 3 percent for 2013 and 3.8 percent for 2014.

Matolcsy switched to the central bank from the helm of the Economy Ministry, where he argued against EU and IMF assessments, which said the country’s budget -- based on extraordinary corporate taxes that damaged investment, lending and growth -- was unsustainable. Days before taking over the MNB, Matolcsy called a central bank report “immoral” and “unethical,” raising concern about the independence of the institution under his leadership.

“The central bank’s budget deficit forecast turned out to be overly pessimistic for last year so we made some changes to the assumptions, which will bring it closer to reality in the future,” Daniel Palotai, the bank’s new chief economist, told reporters today.

Hungarian Prime Minister Viktor Orban’s priorities for this include ending a recession and exiting the EU’s excessive- deficit procedure for budget offenders, which would remove the threat of cuts in the bloc’s funding a year before elections.

The European Commission forecast a budget gap of 3.4 percent of GDP for Hungary for both 2013 and 2014. The IMF, in October of last year, forecast a shortfall at 3.7 percent in 2013 and 3.8 percent in 2014, according to comparisons published in today’s central bank report.

The Magyar Nemzeti Bank reduced the two-week deposit rate by a quarter-point to 5 percent on March 26, trimming it for an eighth month and matching the forecast of 25 of 29 economists in a Bloomberg survey. The cuts can continue if market confidence improves, policy makers said in a statement.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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