Karvalits Urges Caution With Hungary Rates on ‘Bumpy’ IMF Talks
Ferenc Karvalits, a Hungarian central bank vice president, comments on monetary policy during aid talks with the International Monetary Fund.
Karvalits commented in an e-mailed response to questions from Bloomberg News.
On the impact of the IMF talks on interest rates:
“Risk spreads are not the only factor in monetary-policy making, the inflation outlook and the real economy situation are also very important. At the same time, risk spreads on Hungarian assets are influenced by several other factors, than negotiations, including the situation of the European debt crisis. So IMF talks are an important, but not the only factor in current monetary policy making.
‘‘During negotiations, policy has to be extremely cautious. Being in the process of negotiations is not the same as a signed deal. I expect the road to the contract to be bumpy, and as markets can overreact to the situation in both directions, monetary policy has to remain an anchor for markets.
‘‘I would not link the interest-rate path directly to IMF talks. Once risk spreads on forint assets are at a securely lower level than now, and the inflation outlook is well in line with the medium-term target, a cut in the base rate is a possibility.’’
On the Monetary Policy Council having considered a rate increase last month:
‘‘According to the baseline forecast of the latest Inflation Report, the inflation target can be achieved on the policy horizon with keeping the base rate constant for an extended period.
‘‘The Report also contained risk scenarios with a more optimistic and pessimistic outlook than the baseline. These scenarios in the short term did not indicate substantial deviation from the current interest-rate level.
‘‘However, MPC members set the base rate in an unusually volatile economic environment. The situation of the European debt crisis, oil prices and investors’ perceptions of Hungarian economic policy change substantially from one day to another. This means that MPC members may have diverging views regarding the possible development of the economy, and it does not necessary coincides with the staff’s view in the Report.
‘‘The suggestion for an interest-rate hike reflects the MPC member’s more pessimistic view of the inflation outlook and financial market conditions. If the risk perception of Hungarian assets deteriorates persistently or inflation processes prove to be unfavourable compared to expectations, a rate hike remains a possibility.’’
On the timing of the IMF talks:
‘‘The IMF and EU have made their position clear that the independence of the Magyar Nemzeti Bank must be fully ensured. Amending the relevant legislation is a precondition for setting a date for the loan negotiations.
‘‘Expert level consultations involving the Hungarian Government, the MNB, the ECB, the Commission and the International Monetary Fund are underway to resolve open questions. The MNB has on several occasions commented on the amendment to the Central Bank Act. Our position has not changed since submission of the amendments to the Act.
‘‘We hope that, as a result of the pentalateral negotiations, a legislation will be adopted which provides adequate guarantees for ensuring full central bank independence.’’
On whether Hungary is prepared for a deepening euro crisis:
‘‘Hungarian fundamentals improved visibly compared to the pre-crisis situation: we have a clear current-account surplus and the structural budget deficit is also declining substantially. It is clear however that debt stocks are still high, so we are vulnerable.
‘‘In addition, as in the past unorthodox measures were not welcomed by markets, high risk spreads on Hungarian assets also reflect weakening trust in Hungarian economic policy.
‘‘In this respect, Hungary pays an extra confidence premium on its debt, which would be nice to avoid. This requires more predictable and market-oriented economic policies, which would also contribute to a smooth negotiation process with international organizations.’’
On the debate over austerity versus growth in the Hungarian context:
‘‘According to my view, fiscal loosening is not an option for Hungary, as our country is highly indebted compared to its level of economic development. A loosening could undermine confidence, increase risk premiums and could lead to unsustainable public debt path. Furthermore, as currently high risk spreads and consequently scarce external financing is the most obvious obstacle against economic activity in the private sector, decreasing risk premium is also a must from the point of view of economic growth.’’
On the impact of Hungary’s new taxes on growth and inflation:
‘‘We continuously follow new developments. As always, the new forecast to be published in June will contain new incoming information from every field of the economy.
‘‘Government plans are still evolving, so even if I would like to, I could not give a reasonable forecast now. It seems a safe bet, however, to say that as a primary effect, government measures raise inflation and decrease GDP growth on the forecast horizon. Hopefully, they will also contribute to a declining risk premium, which would help the economic situation.’’
On the new financial transactions tax:
‘‘Theoretical considerations and international experience suggest that, by increasing the costs of payment transactions, a financial transaction tax could contribute to the deterioration in a country’s ability to attract capital, which in turn may reduce the efficiency of financial intermediation.
‘‘As a result, it may worsen the sustainability of the improvement in fiscal balances and may be associated with an erosion of the country’s growth potential and an increase in its financing costs.
‘‘The imposition of the tax may encourage economic agents to increase the use of cash, which in turn may lead to an expansion of the informal economy and, ultimately, to a decline in revenue from transaction and other taxes. The 0.1 percent financial transaction tax, to be introduced in Hungary, is not high by international standards; however, because the authorities seemingly plan to impose the tax without setting a ceiling on individual transactions, companies with significant payment values and firms active in financial markets will see their costs rise sharply.’’
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