Economy
Growth of the Hungarian economy certain, real wages are to rise next year - Karvalits
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Karvalits said rising global food prices was a “long-term, trend-like phenomenon" that would linger on and “continue to affect inflation expectations in the long term".
With regard to wage developments, he noted that the central bank would need to see the outcome of 2008 wage talks and the actual extent of wage hikes in the private sector next year before to gain a clearer picture on wage developments.
He also said real wages would grow for the first time in several years, which would also boost consumption. He noted, however, that companies would definitely need to carry out investments if they want to remain competitive in the European business climate.
He believes that in the wake of increased consumption and investments GDP growth could be back at around 3-4% in two to three years. (In its latest Convergence Programme released in November, the cabinet has cut back its forecast for GDP growth to 1.7% yr/yr for 2007 (from 2.2%), but raised it to 2.8% for 2008 (from 2.6%). For 2009 it now expects a growth of 4.0% (vs. 4.2% set in Dec 06) and for 2010 it also trimmed back its projection by 0.2 ppts to 4.1%. By 2011 GDP growth should be back at 4.2% yr/yr, according to the government.)
Karvalits said a 4.0-4.5% growth target was realistic, but action by the government to reach it was indispensable.
Hungary's consumer prices rose by 6.7% in October, ticking up from 6.4% in September. Analysts polled by Portfolio.hu on Friday expect further CPI acceleration. Their consensus forecast for November inflation came in at 7.1%. Moreover, it took only a month for their median forecast for Dec yr/yr inflation to jump to 7.1% from 6.5%.The Central Statistics Office (KSH) is set to release Nov CPI data on Tuesday at 09:00 CET.
Karvalits said the NBH, faced with high inflation and extremely slow GDP growth (0.0% q/q in Q2 and +0.3% q/q in July-Sept), the bank is committed to a cautious monetary policy.
He said the rate setting Monetary Council expected “a slow rate cut cycle over the next one, one and a half years". Since the start of the easing cycle in June, the MPC cut rates only twice this year.
At its latest policy meeting on 26 November it voted 9 to 3 to keep rates on hold at 7.50% . Members agreed that an increase in inflation expectations was the most important upside risk.
NBH Governor András Simor told Portfolio.hu in an interview last week that he considered it a “failure" that the bank's “key objective, price stability, would not be achieved in 2008."
In its latest quarterly Report on Inflation, the NBH knocked up its annual average CPI forecast for 2008 to 5.0% from 4.5% and also raised its projection for 2009 inflation to 3.0% from 2.4%, compared to its August report. The bank's medium-term inflation goal is 3% (+/-1 ppt) for 2009.
“This is a failure for us even if we can state that divergence from the (inflation) path is caused basically by external factors," Simor added.
In the current situation, Karvalits said, it would be impossible boost economic growth by the means Finance Minister Lajos Bokros resorted to in the second half of the 1990s, namely the devaluation of the forint, which led to smaller labour costs and thus enhanced the competitiveness of companies.
“We need to pay attention to the exchange rate also because of the Maastricht criteria and devaluation would only fuel inflation anyhow," Karvalits said.
He added that there were two ways to bolster growth: improving productivity would result in smaller growth, while taming nominal wage growth hold the promise of faster growth. The two may be combined, he said, but putting the restraint on wages would demand more rigour from policymakers, and the only way to expect a forward-looking, co-operative attitude from social partners is to be credible. He said tax wedge was a considerable problem with regard to productivity.
He welcomed the increased efforts to clamp down on tax evasion and to widen the tax base, but no one should be under the illusion that tax reductions would be possible before 2009, given the current state of the budget.
With regard to wage developments, he noted that the central bank would need to see the outcome of 2008 wage talks and the actual extent of wage hikes in the private sector next year before to gain a clearer picture on wage developments.
He also said real wages would grow for the first time in several years, which would also boost consumption. He noted, however, that companies would definitely need to carry out investments if they want to remain competitive in the European business climate.
He believes that in the wake of increased consumption and investments GDP growth could be back at around 3-4% in two to three years. (In its latest Convergence Programme released in November, the cabinet has cut back its forecast for GDP growth to 1.7% yr/yr for 2007 (from 2.2%), but raised it to 2.8% for 2008 (from 2.6%). For 2009 it now expects a growth of 4.0% (vs. 4.2% set in Dec 06) and for 2010 it also trimmed back its projection by 0.2 ppts to 4.1%. By 2011 GDP growth should be back at 4.2% yr/yr, according to the government.)
Karvalits said a 4.0-4.5% growth target was realistic, but action by the government to reach it was indispensable.
Hungary's consumer prices rose by 6.7% in October, ticking up from 6.4% in September. Analysts polled by Portfolio.hu on Friday expect further CPI acceleration. Their consensus forecast for November inflation came in at 7.1%. Moreover, it took only a month for their median forecast for Dec yr/yr inflation to jump to 7.1% from 6.5%.The Central Statistics Office (KSH) is set to release Nov CPI data on Tuesday at 09:00 CET.
Karvalits said the NBH, faced with high inflation and extremely slow GDP growth (0.0% q/q in Q2 and +0.3% q/q in July-Sept), the bank is committed to a cautious monetary policy.
He said the rate setting Monetary Council expected “a slow rate cut cycle over the next one, one and a half years". Since the start of the easing cycle in June, the MPC cut rates only twice this year.
At its latest policy meeting on 26 November it voted 9 to 3 to keep rates on hold at 7.50% . Members agreed that an increase in inflation expectations was the most important upside risk.
NBH Governor András Simor told Portfolio.hu in an interview last week that he considered it a “failure" that the bank's “key objective, price stability, would not be achieved in 2008."
In its latest quarterly Report on Inflation, the NBH knocked up its annual average CPI forecast for 2008 to 5.0% from 4.5% and also raised its projection for 2009 inflation to 3.0% from 2.4%, compared to its August report. The bank's medium-term inflation goal is 3% (+/-1 ppt) for 2009.
“This is a failure for us even if we can state that divergence from the (inflation) path is caused basically by external factors," Simor added.
In the current situation, Karvalits said, it would be impossible boost economic growth by the means Finance Minister Lajos Bokros resorted to in the second half of the 1990s, namely the devaluation of the forint, which led to smaller labour costs and thus enhanced the competitiveness of companies.
“We need to pay attention to the exchange rate also because of the Maastricht criteria and devaluation would only fuel inflation anyhow," Karvalits said.
He added that there were two ways to bolster growth: improving productivity would result in smaller growth, while taming nominal wage growth hold the promise of faster growth. The two may be combined, he said, but putting the restraint on wages would demand more rigour from policymakers, and the only way to expect a forward-looking, co-operative attitude from social partners is to be credible. He said tax wedge was a considerable problem with regard to productivity.
He welcomed the increased efforts to clamp down on tax evasion and to widen the tax base, but no one should be under the illusion that tax reductions would be possible before 2009, given the current state of the budget.
