National Bank head says further rate cuts possible if outlook improves

The National Bank of Hungary could cut rates further if the inflationary outlook and the country’s risk assessment allows, National Bank of Hungary (NBH) governor Andras Simor told Parliament’s economy committee on Wednesday.

The central bank is cautiously trying to loosen monetary policy while closely monitoring stability risks, but the bank cannot commit itself to any path of rate reductions, Mr Simor said.

A rise in indirect taxes, including VAT, will have only a temporary (upside) effect on prices, Mr Simor said. Inflation is expected to drop below the 3pc mid-term target from the second half of 2010 as the sharp fall in domestic demand forces retailers to lower prices, he added.

All this would justify a monetary policy easing, but a too rapid rate reduction, if coinciding with an external shock, could increase the chance for a sudden large-size forint weakening, Mr Simor said.

Hungary should not rush the country’s entry into the ERM II compared to the targeted date of euro accession; the least possible time should be spent in the exchange rate mechanism, and it is not wise to announce the entry date too early due to the risk of speculation, Mr Simor warned at the committee hearing.

Hungary got closer to the introduction of the euro, especially in the terms of the inflation and fiscal deficit criteria — precisely the two previously considered to be the most difficult. Hungary must follow a very disciplined economic policy, however, in order to meet the other eurozone requirements, Mr Simor said.

Exchange-rate volatility makes it difficult to specify the forint’s optimum equilibrium rate, the NBH governor said.

“It would be good to wait until the dust settles before fixing the forint’s rate”, Mr Simor said, noting that at present it is impossible to accurately assess the growth potential of Hungary’s economy and what equilibrium rate would be beneficial to the economy over the longer run.

Stability risks has considerably lessened, the capital position of Hungary’s banking sysem has strengthened, its capital adequacy is high in international comparison. Mer Simor noted as positive that foreign parent banks vowed committment to their Hungarian subsidiaries.

The NBH talked of the need of continued fiscal discipline and said that a further drop of risk spreads could support the private sector to emerge more rapidly from the crisis.