Hungary "further from IMF deal" than a year ago: central banker

BUDAPEST Tue Nov 27, 2012 1:57pm EST

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BUDAPEST (Reuters) - Hungary's central bank cut rates again on Tuesday to help the shrinking economy even though the bank's Governor said the country was drifting away from an IMF and EU loan deal.

The government member in charge of the talks played down the importance of an agreement, speaking later at a conference.

After the bank lowered rates for a fourth straight month, its Governor, Andras Simor said Hungary was further from a deal with the International Monetary Fund and the European Union than a year ago when it announced it would seek aid.

In unusually blunt remarks, Simor, who has frequently come under fire from Prime Minister Viktor Orban's government, indicated that formal talks with international lenders on a financing backstop had collapsed.

"Regarding my opinion, I think we are not closer, but further (from an IMF agreement than a year ago)," Simor told a news conference in response to a question after the bank lowered rates by another 25 basis points to 6 percent.

"I would like to call your attention to a November 21 statement from the IMF, which said that 'while we continue to exchange views, no formal negotiations are taking place at this point, there are currently no formal talks about a loan to Hungary.'

"This does not say there is no date, it says there are no talks. I think these are two different things."

The International Monetary Fund's representative in Hungary could not immediately respond to questions seeking comment.

Mihaly Varga, the minister in charge of the aid talks said the government wanted an agreement "but not at any price" and a deal would not influence Hungary's assessment significantly.

"Certainly investors want a guarantee on their investments. We say the Hungarian state that has been operating for more than a thousand years, is sufficient guarantee," he was quoted by the national news agency as saying at a conference.

He said the government, which has levied Europe's highest bank tax, insisted on keeping that policy even though the IMF believed that it stifled investments and economic growth.

The forint, which sold off briefly after Simor's remarks, regained ground to trade at 280.20 versus the euro at 16.07 GMT, a shade weaker from levels before the announcement but still stronger than the 284.5 before October's rate cut. Government bonds were unchanged.

Analysts see only a 30 percent chance of an agreement with the International Monetary Fund and the EU, down from 50 percent a month ago. Deficit-cutting moves announced in three steps were made in direct opposition to lenders' advice.

A weak growth outlook and new unorthodox policies by Orban, such as making Europe's highest bank tax permanent and imposing special taxes on the service sector, prompted Standard & Poor's to cut Hungary's credit rating deeper into "junk" status on Friday.

In a post-meeting statement, the rate-setting Monetary Council, split down the middle between newer members appointed by parliament last year and Simor and his deputies, also struck a note of caution regarding the government's aid request.

"Higher risks around the agreement with the multinational organizations and the downgrade of Hungary's sovereign debt by S&P may lead to an increase in perceptions of the risks associated with the economy," the seven-strong panel said.

However, it kept the door open to a further reduction in official rates, which are still the EU's highest, if improved financial market sentiment persists and the inflation outlook remains consistent with its 3 percent medium-term target.

SLIM MAJORITY

The Monetary Council, where four members appointed by Prime Minister Viktor Orban's ruling Fidesz party have constantly outvoted the bank's governor and his two deputies in past months, flagged further easing to aid the recession-hit economy.

Governor Simor told a news conference the bank discussed keeping rates on hold and cutting them by 25 basis points, as it had the past three months. The latter option was backed by a "slim majority" on the rate-setting panel.

The exact votes will not be published until next week. But analysts said the decision confirmed that dovish policy makers appointed by Fidesz hold the upper hand on policy this year.

"It is clear that the doves on the Monetary Council are in full control of monetary policy," said analyst Stanislava Pravdova at Danske Bank. "Consequently, we expect the National Bank of Hungary to continue the easing of monetary policy in coming months despite inflation being double the level of the central bank's official inflation target of 3 percent."

Inflation eased to an annual 6 percent in October from a more-than-four-year high of 6.6 percent in September. The bank has said it could reach its price target sometime in 2014.

The bank's internal members have called for unchanged rates because of inflation and market risks, but the dovish camp has said weak demand in the economy, which is expected to barely grow next year after a recession in 2012, would keep a lid on prices.

The base rate is expected to fall to a low of 5.25 percent by the middle of next year, then end the year at 5.5 percent. By then Simor and his deputies will have been replaced by new management at the bank.

(Reporting by Gergely Szakacs/Sandor Peto; Editing by Patrick Graham, Larry King, Ron Askew)

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