Hungary’s economy will contract in 2012, the central bank said Tuesday revising its projection from March, when it expected marginal growth. The central bank (MNB) earlier expected the economy to grow 0.1%.
“We now reckon with a 0.8% recession in 2012,” central bank governor, András Simor, told reporters after the Monetary Policy Council’s rate-setting meeting. The 2013 growth outlook was cut almost to half to 0.8% from 1.5% previously.

MNB kept its main interest rate unchanged at 7% and also released the cornerstone figures from its quarterly Inflation Report, laying out macroeconomic projections for this year and next. The report reveals a worsening outlook for consumer price inflation. Whereas the March report indicated that the central bank’s 3% mid-term inflation target could be achieved in 2013, the latest projections show above-target inflation both this year and next, with the indicator nearing target at the end of 2013.
“In terms of inflation, we determined that there’s still no pressure from the real economy. In fact, our projections for the real economy are now revised downwards,” Mr. Simor said. Heavily muted domestic consumption has a deflationary effect, he added.
This, however, is offset by new taxes introduced earlier this year and featured in Hungary’s 2013 budget, which stoke inflation.
Mr. Simor said that the rate-setting panel is strongly encouraging the government to reach a financial agreement with the European Union and the International Monetary Fund, which would greatly reduce risks. Only if there is improvement in this aspect will the central bank be able to cut its rates. Hungary is seeking a €15 billion credit line from the IMF.
“The Council will consider a reduction in interest rates if Hungary’s risk premium falls persistently and substantially and the outlook for inflation improves,” the central bank governor said, putting to rest any hopes that Hungary would cut its main interest rate–the European Union’s highest–in the near future.
Mr. Simor also expressed satisfaction that the dispute between the government and the EU/IMF over Hungary’s central bank law appears close to a resolution, removing an obstacle to the beginning of formal talks on the credit line.
Source: Wall Street Journal