Hungary should pause with monetary easing after the benchmark interest rate dropped to a record low in a series of “appropriate” cuts, the International Monetary Fund said.
A further “deep” reduction of borrowing costs raises the risk of weakening the forint and undermining financial stability, the Washington-based lender said in its annual report on Hungary’s economy, dated March 5 and published on its website today. The IMF provided the bulk of a 20 billion-euro bailout ($26 billion) for the country in 2008.
The Magyar Nemzeti Bank reduced its benchmark rate by a quarter-point to a record low 5 percent on March 26, trimming it for an eighth month as it seeks to help the economy exit its second recession in four years. The economy will stagnate this year as the government’s “interference” in the economy through “frequent and unpredictable” policy changes have hurt investments, undercutting recovery prospects, the IMF said.
“While the recent monetary-policy easing was appropriate, a pause in the easing cycle seems prudent at this point,” the IMF said in the report. “In fact, with fickle market confidence, deep policy rate cuts could lead to currency depreciation and could risk destabilizing the financial system.”
The forint strengthened 0.1 percent to 304.17 per euro by 2:47 p.m. in Budapest. It has weakened 4 percent against Europe’s common currency this year, the second-worst performance among more than 20 emerging-market currencies tracked by Bloomberg behind the South African rand.
The Hungarian central bank this week tightened its conditions for monetary easing after new Governor Gyorgy Matolcsy’s first rate decision. Cuts can continue only if market confidence improves, policy makers said in a statement on March 26.
Inflation will average 3.2 percent this year and 3.4 percent next year, the IMF said. The central bank estimates price growth below its 3 percent target both years, according to forecasts published yesterday.
Consumer prices rose 2.8 percent last month from a year earlier, the slowest pace in seven years.
Hungary is set to overshoot its deficit targets in the medium-term, with the shortfall widening to 3.2 percent of economic output this year and 3.4 percent in 2014, the IMF said. The MNB yesterday cut its forecast for the gap to below 3 percent both years.
Prime Minister Viktor Orban, who nominated his former economy minister Matolcsy for the central bank job, deployed measures including the nationalization of private-pension fund assets and levied retroactive industry taxes to narrow the budget shortfall and exit a European Union fiscal oversight. The Cabinet expects the deficit to remain below the bloc’s limit of 3 percent of economic output this year and next.
The IMF during its review that ended Jan. 26 expressed “deep concern” about the composition of measures underpinning the budget and urged a “significant improvement” in policies, including the gradual elimination of special industry taxes, according to the report.
The government estimates 0.9 percent expansion this year, while the central bank forecasts 0.5 percent growth.