National Bank head warns further rate cuts could hit forint

National Bank of Hungary (NBH) Governor Andras Simor said on Sunday that central-bank instruments must be used only with great prudence, and further NBH rate-cuts could further weaken the forint.

Speaking on a television program on Sunday evening, Mr Simor also urged immediate reforms, adding that the impact of current reform measures would be felt only in 2012-2013 the earliest. He noted that claims that steps can be taken to improve the economy more rapidly are deceptive.

The NBH governor attributed the forint’s current weakness to the that of the Hungarian economy, stipulating the increase of Hungary’s economic growth potential to be the means of resolving the fundamental problem.

Mr Simor said that Hungary was farther away from bankruptcy than it was two months ago. The central bank extraordianary rate rise, the loans from the IMF and EU have given the government time to make the necessary structural transformations to strengthen the Hungarian economy.

The NBH governor said that long-needed measures, such as spurring employment and competition, must be taken in order to overcome the current economic crisis. If Hungary remains weak it will have a deeper recession than other countries.

“If we don’t act, the situation is going to get worse — sooner or later both political officials and the people are going to accept the fact that we cannot continue down this path”, the NBH governor said.

With regard to central-bank measures aimed at increasing the liquidity of banks, Mr Simor commented that the NBH cannot resolve credit-market difficulties on its own, adding that the central bank can only inject liquidity into the market, while it is up to banks to make loans. Bank must have faith in the prospect of growth to lend, the central bank governor said.