MNI INTERVIEW: NBH To Choose Stability Over Cuts -Ex Gov Simor
MNI (LONDON) - The National Bank of Hungary will hold key interest rates for a second month when it meets next week, former governor Andras Simor told MNI in an interview, with risk aversion likely to trump current Governor Gyorgy Matolcsy’s probable desire to cut rates before he leaves office in March.
The NBH cut by 25 basis points in September but held at 6.50% last month, with CPI inflation seen rising to slightly over 4% by year-end and core inflation at around 5%. Since then, data has been fairly negative, Simor said, with the country in recession for the last two quarters, though inflation surprised positively.
That may mean there is still room to cut rates, but forint weakening linked to the U.S. presidential election makes it sensible to "sit it out, to wait and see,” said Simor, who headed the Bank from 2007-2013.
“There is no point in my view of taking too much risk and cutting now - especially since the governor has only three months left from his mandate," Simor said. “I don't think he will be in a particular hurry to take risks, although he probably does want to be remembered as a rate-cutting governor in spite of rates going up to 18% at one point during his term.”
The forint has weakened by 2-3% compared with summer levels, Simor said, adding that while this is “not good for inflation, it's not dramatic either,” so talk of tightening would be premature.
“If the central bank declares that they are committed to getting inflation down, that they will do what is necessary, that they will not rush into further cuts but will stay alert - these kinds of messages probably would be enough for the market to not weaken the forint further,” he said. (See MNI EM INTERVIEW: NBH To Hold Rates)
BUDGET IMPACT
It is too soon to calculate the net effect of the government’s 2025 Budget proposals on prices, although he noted that indexation, a bigger impact of some existing taxes, plus the introduction of new levies, will help government finances.
“On balance the draft Budget is probably more inflationary than deflationary, but we also don’t know whether this is the government's final say on the matter,” he said.
Employers will be keen to slow salary rises from high levels seen this year, but they face upward pressure from minimum wage increases.
“The problem is that the government wants to accelerate the economy, but their hands are tied. Monetary policy can do very little to help, which leaves trying to increase incomes as the only tool the government really has. They don’t have much leeway in the state sector, which leaves raising the minimum wage in the hope that that will impact the whole wage scale,” Simor said.
Further stimulus measures may be introduced if growth fails to pick up in Q1 2025, he said. But while this could be a factor in the minds of policymakers now, “that will be more for the next governor to think about.”
INCOMING GOVERNOR
Matolcsy’s replacement - expected to be Finance Minister Mihaly Varga - will arrive at a “very difficult” time for the central bank, Simor said, but is unlikely to try anything “radically different.” Even so, Vargas’ natural economic conservatism may be tested by his long-standing loyalty to Prime Minister Viktor Orban.
“It's not an obvious choice for the central bank to reduce interest rates at this juncture. I don't think the government has recently put a lot of pressure on the current governor to do so, but they might try to convince the new governor that's the right approach,” Simor said. “However, the advice from the central bank staff may not align with such an approach, so it's going to be an extremely challenging period for him, and it will be very interesting to see how things evolve once he's in office.”