Bloomberg News

Hungary Needs More Budget Steps, Patience on Rates, Simor Says

September 29, 2011

Sept. 29 (Bloomberg) -- Hungary needs to take additional budget steps because economic growth next year is set to miss the Cabinet’s forecast, central bank President Andras Simor said.

The economic outlook may change “significantly” depending on how many people take advantage of a government offer of early repayment of foreign-currency mortgages at below market rates, Simor told a conference in Pecs, southern Hungary, today.

Hungary -- which is rated the lowest investment grade at Fitch Ratings, Moody’s Investors Service and Standard and Poor’s -- is struggling to trim its budget deficit to less than 3 percent of output next year as slower growth cuts tax revenue.

The Magyar Nemzeti Bank expects 20 percent of Hungary’s 18 billion euros ($24.5 billion) in foreign-currency mortgages to be repaid under the government’s home-loan plan, Simor said on Sept 20. An offer to allow lenders to use the central bank’s reserves as demand for foreign currencies rises should “dampen” risks to financial stability, he said.

The outlook may change depending on how many people repay their mortgages ahead of schedule, Simor said. The government is offering borrowers to repay their mortgages at as much as 20 percent below market rates, with lenders swallowing losses.

The central bank, which held the benchmark rate unchanged at 6 percent for an eighth month on Sept. 20, cut its 2012 economic-growth forecast last week in response to government plans to raise taxes and said an interest-rate cut may come “only in the mid-term” once the country’s risk premium declines.

‘Wait and See’

Simor reiterated that a “wait-and-see” monetary policy stance is warranted in the current risk environment.

Global investors anticipate Europe’s debt crisis leading to an economic slump, a financial meltdown and social unrest in the next year with 72 percent predicting a country abandoning the euro as a shared currency within five years, according to a Sept. 26 poll of 1,031 investors, analysts and traders who are Bloomberg subscribers. About three-quarters said the euro-area’s economy will fall into recession during the next 12 months.

“The risk environment and the uncertainty in financial markets warrant a wait-and-see monetary policy,” Simor said.

Hungary cut its offer of 12-month Treasury bills by 34 percent at an auction today after getting the lowest amount of bids on that maturity in more than six years. The forint depreciated 0.2 percent to 290.9 per euro as of 11:47 a.m. in Budapest.

Slowing economic growth is reducing domestic inflation pressures while imported inflation pressures are also easing, Simor said today. Planned tax increases this year and next will keep the inflation rate “high” before a forecast fall to the bank’s 3 percent target in the first half of 2013, he said.

The economy may grow 1 percent next year, compared with an earlier estimate of 1.5 percent, the Magyar Nemzeti Bank said in a Sept. 22 report. The government is basing its 2012 budget on a growth forecast of 1.5 percent, Economy Minister Gyorgy Matolcsy said on Sept. 16.

--Editors: Alan Crosby, Douglas Lytle

To contact the reporters responsible for this story: Zoltan Simon at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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