(Updates with budget forecast in sixth paragraph.)
Oct. 20 (Bloomberg) -- Hungary’s tax and minimum-wage increases next year will probably boost inflation to a higher level than previously estimated, the central bank said.
The inflation rate will average 4.9 percent in 2012, rather than 4.7 percent as predicted in September, the Magyar Nemzeti Bank in Budapest said in a report published today.
The government is raising taxes, introducing new levies and cutting spending to narrow the budget deficit to 2.5 percent of economic output next year. The effect of the measures on prices will outweigh a lack of pressure from domestic demand, according to the central bank’s report.
“The increase in indirect taxes will have a significant price-boosting impact at the beginning of 2012,” the report said. “Although weak domestic demand may lead to a more subdued inflation, companies may resort to raising prices to compensate for their higher costs following the minimum wage increase.”
The forint traded at 295.97 per euro at 12:15 p.m. in Budapest, compared with 296.04 yesterday. The yield on the country’s benchmark five-year bond fell to 7.35 percent from 7.42 percent.
The government expects inflation to average 4.2 percent next year. The central bank targets 3 percent inflation in the medium term and policy makers expect the price gauge to near that level in the first half of 2013, central bank Governor Andras Simor said on Sept. 20.
The government’s decision to raise the value-added tax, a sales levy, to 27 percent, the highest in the European Union, an increase in excise taxes on tobacco and alcoholic beverages and an expected rise in wages following the the minimum-wage boost are responsible for the higher projection, the study said.
The central bank expects the budget shortfall to reach 3.1 percent, Simor said on Oct. 18.
The difference between the deficit forecast stems primarily from the central bank’s more pessimistic expectations on the result of government measures, according to the report released today. The MNB expects less revenue from a gambling tax and the value-added tax and sees 40 percent of savings planned at the state health fund “justified by measures,” the study said.
Hungary’s net interest payments on public debt will be 23 billion forint ($106 million) higher than the Cabinet’s forecast as the forint will likely be weaker than what the government calculated with in the budget, the study said.
The central bank calculated with a forint exchange rate that’s “close to current levels,” while the budget is based on a forint rate assumption of 268 per euro, Lorant Varga, chief analyst at the central bank said at a press conference today.
--Editors: Balazs Penz, James M. Gomez
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