Hungary should ensure central bank independence: IMF

Further monetary easing "should be considered very cautiously" by Hungary, which should keep the central bank independent

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In the concluding statement of an IMF mission to Budapest under the Article IV consultation, the IMF said that inflation was “still not well anchored” as its decline to 3.5% projected for this year would partly be due to cuts in utility tariffs.

“While the desire to help rekindle domestic demand is understandable, lower policy rates are unlikely to have a material impact on credit and aggregate demand at the current juncture given the difficult operational environment for banks,” the IMF said.

It added that although the foreign currency exposure of private and public balance sheets had been reduced, it was still significant and further rate cuts could result in the depreciation of the forint, which “could be destabilizing.”

The six-year mandate of the Hungarian central bank’s vocal governor Andras Simor ends on March 3 and one strategist said that shorting the forint might be a good idea as Simor’s departure might herald an era when the central bank (MNB) would be more willing to yield to government pressure to cut interest rates.

“A strong policy framework, including maintaining the independence of the MNB and the credibility of the inflation targeting regime would support a durable improvement in business and market sentiment,” the IMF said.

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“In this regard, in an environment of continued capital inflows, the MNB should maintain adequately high level of reserves to provide buffers against shocks.”


The Fund’s experts also called for a different fiscal policy mix, one that could bring down the deficit and the debt in a “more growth friendly and sustainable way.”

This could be done by reducing the cost of government bureaucracy, including by recently announced measures to cut jobs in the central government, and containing spending at the local government level, as well as restructuring loss-making state-owned enterprises in the transport sector.

Better targeting of social benefits to vulnerable groups, gradual elimination of sectoral taxes, reducing disincentives to labour participation, cutting tax expenditures and tackling VAT fraud were also among the measures recommended by the IMF.

The Fund expects the budget deficit to increase to 3.25% of GDP this year because of possible revenue shortfalls – including from tax administration and the banking transaction tax – delays in launching the electronic toll system, and higher spending on education and copayments of European Union funds.

The Fund sees the deficit staying above 3% of GDP in 2014 and 2015 and public debt remaining around 78% of GDP.