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.

The gap will be 2.9 percent of gross domestic product this year and next, according to the Magyar Nemzeti Bank’s quarterly forecasts, published today in Budapest. The previous estimate was 3 percent for 2013 and 3.8 percent for 2014. The European Commission predicts 3.4 percent for for both years.

Matolcsy switched to the central bank from the helm of the Economy Ministry, where he argued against EU and International Monetary Fund assessments, which said extraordinary corporate taxes that damaged investment, lending and growth made the budget unsustainable. Before his appointment, Matolcsy called a central bank debt forecast “immoral” and “unethical.”

“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,” Daniel Palotai, the bank’s new chief economist, told reporters today.

The forint weakened 0.1 percent to 304.13 per euro by 10:50 a.m. in Budapest, snapping a three-day rally. It has weakened 4.2 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.

Rate Cut

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.

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.

Orban’s Cabinet is committed to “structural” measures, to be presented in April, that will keep the deficit within the EU limit of 3 percent of GDP, EU Economic and Monetary Affairs Commissioner Olli Rehn said in Brussels on Feb. 22. after the commission forecast that Hungary is on track to breach the EU limit.

“Don’t let the European Union’s forecasts bother you, because it hasn’t been able to predict our budget deficit a single time,” Orban said in Budapest the same day.

Budget Assumptions

The central bank’s new forecast is based on the assumption that the government will “in the near future” take steps to ensure the collection of a bank-transaction levy that has so far missed targets and that the effective tax rate will rise as a result of improved tax collection. The government may need to “present measures” in its April euro-convergence program to “prove the government’s longer-term commitment to the deficit targets,” according to the central bank’s report.

For 2014, “strict” management at the local-government level and a “decline in the expected compensation” of central bank losses from the budget may improve the budget balance, the central bank said.

The central bank on March 26 maintained its 0.5 percent growth forecast for this year and raised its 2014 projection to 1.7 percent from 1.5 percent. The commission forecasts a contraction of 0.1 percent this year and 1.3 percent growth in 2014.

The inflation rate is forecast at 2.6 percent this year and 2.8 percent in 2014. Core inflation, which strips out volatile energy costs, is projected at 4 percent in 2013 and 3.4 percent in 2014.

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