HUNGARY: NBH fears the Szell Kalman Plan 2.0 could lead to higher inflation and may increase the "black economy"

The Monetary Council of Hungary's central bank (NBH) has voted on April 24th to leave the key policy rate unchanged at 7.00%. Thus, it will be the fourth consecutive month when the indicator's value is kept at this level, asthe high volatility of risk perceptions and recent trends in underlying inflation continue to warrant a cautious policy stance. One of the main reasons of concern for the MC's members is the possible inflationary trend generated by the measures recently announced by the government with the Szell Kalman Plan 2.0.

According portfolio.hu, NBH Governor Andras SIMOR warned that due to the new taxes announced by the government yesterday inflation will most likely be considerably higher in 2013 than envisaged by the central bank previously. He said Hungary's inflation will probably be considerably higher in 2013 than the NBH thought before the Szell Kalman Plan 2.0 was announced. The cabinet forecasts annual average inflation of 4.2% for next year, while the central bank's target is 3.0%. NBH staff said in the Inflation Report published at the end of March that "the consumer price index is projected to fall quickly to meet the inflation target in early 2013."

With regard to the financial transaction tax the cabinet would introduce next year, SIMOR said the NBH estimates the tax could reduce the country's capital attraction capacity and the effectiveness of the financial intermediary system. There is also a risk that the improvement in the budget balance is not achieved in a sustainable way and funding costs could also rise. The tax also spurs people to pay with cash more often and it can increase the 'black economy'.

When asked what net budget impact the Bank expects from the measures, SIMOR responded that at this point they only see the gross figures. He reminded that the measures will be applicable on the state as well, i.e. the new telecoms and financial transaction taxes will need to be paid by the state too. The Bank will need to calculate what effect these will have on the budget. Presumably these will curb growth, which will lower tax revenues, so the net budget influence will not be the same as the gross estimates made by the cabinet, he added. However, the exact difference cannot be estimated at this point. Simor said that the next Inflation Report will probably include some estimate on this.

Source: portfolio.hu

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