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Hungary Easing Should Come Once Cost Pressures Abate, MNB Says

Hungary should lower borrowing costs only when cost pressures ease as rising production costs spark inflation, the central bank said.

“Room for decreasing interest rates will be available when cost-push inflation dissipates,” as factors supporting monetary tightening and easing “cancel each other out” in the short term in the bank’s baseline scenario, the Magyar Nemzeti Bank said today in its quarterly Inflation Report.

The central bank has lowered the main interest rate by a cumulative 125 basis points since July as growth concerns outweighed the rise in inflation. External members appointed to the Monetary Council by the government outvoted central bank President Andras Simor and his two deputies four times, arguing that lower rates would help the economy battle its second recession in four years.

The bank reduced its inflation forecast to an average 3.5 percent next year, compared with a September forecast of 5 percent, citing a 10 percent cut in household energy prices and changes in the timing of excise tax increases.

Government measures will slow price growth “significantly” in the short term, even as rising production costs at companies “gradually increase underlying inflation from the middle of next year,” according to the report.

The central bank may reach its 3 percent inflation target in the second half of 2014, it said.

Tax Burden

Cabinet steps raising the tax burden of companies ensure that the country will meet its budget-deficit target of 2.7 percent of economic output in 2013, the central bank said.

Prime Minister Viktor Orban levied special taxes on banks and telecommunications companies, increased the tax burden on the energy industry as it seeks to narrow the shortfall below a European Union limit.

Tax increases coupled with rising wage costs will hurt profitability, lead to lower investments and may dampen the country’s potential growth level, according to the report.

The bank sees gross domestic product growing 0.5 percent in 2013, versus an earlier forecast of 0.7 percent, after a projected 1.4 percent contraction this year. Inflation will probably average 3.2 percent and the economy will expand 1.5 percent in 2014, the report said.

Core inflation, which strips out raw food and energy prices and adjusted for tax measures, may be 3.5 percent next year and 3.4 percent in 2014.

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