UPDATE 1-Senior Hungarian central banker dovish on inflation

Thu Mar 6, 2014 6:12am EST

Related Topics

* Imported inflation expected to remain low -deputy governor

* Forint swings over longer recent period not extreme

* Econ ministry official warns on real interest rates (Adds economy ministry comment, forint)

By Krisztina Than and Gergely Szakacs

BUDAPEST, March 6 (Reuters) - A top Hungarian central banker painted a dovish picture of the inflation outlook on Thursday, before a report due later this month that the bank says will define whether it can keep cutting interest rates.

The bank has pursued monthly cuts taking its benchmark rate to 2.7 percent from a 2012 peak of 7 percent to spur economic recovery, but economists and some government officials have warned that further rate cuts could be risky given global market concerns about emerging economies.

The forint had weakened to two-year lows of 314 to the euro earlier this year as investors, spooked by the turn in U.S. monetary policy, grew wary about Hungary, still the most indebted state in central Europe. The forint has since recovered to trade at around 309.20 on Thursday, but remains fragile.

Central bank Deputy Governor Adam Balog said on Thursday: "Considering the recent longer period, we (in terms of the forint) have not been much of an outlier in the region."

He told a conference of business website Portfolio.hu that Hungary's economic fundamentals have not changed much since the bank's last inflation report in December. But he said recent inflation data were a surprise to the bank as well. Hungary's annual inflation slowed to zero in January, on the back of government-imposed energy price cuts.

Balog said imported inflation was expected to remain low in the longer term as well, while domestic inflationary expectations - which had been traditionally high and sticky in Hungary, especially in the 1990s - have moderated.

Balog also said Hungary's vulnerability has decreased because its net financing position had improved.

Investors are watching closely the bank's next rate setting meeting on March 25. The bank has said it would decide "on the need and possibility for continuing the easing cycle" in March in light of its new inflation report.

Seven of its policy makers voted last month to cut the base rate by 15 basis points to a new low of 2.7 percent, while two members voted for keeping rates on hold.

The bank cut rates in February despite the market flight from riskier assets as the Federal Reserve reduces its flow of cheap money.

Hungary is seen vulnerable to sudden shifts in investor sentiment because it is heavily reliant on foreign funding, even though its budget deficit is relatively low and it runs a big current account surplus.

On Thursday, a senior economy ministry official warned that Hungarian real interest rates should not sink to levels that no longer support the economic policies of the government.

"There is pressure on real interest rates across the world and we cannot separate ourselves from this," Economy Ministry State Secretary Gabor Orban told the same conference.

"There is a level of real interest rates, which no longer supports the government's economic policies," he said. "The Monetary Council is also aware of this and I am certain that this (factor) is part of their consideration."

In February the bank had ignored a similar comment by Economy Minister Mihaly Varga who said interest rates were "less appealing to investors" who buy Hungary's debt. (Reporting by Krisztina Than and Gergely Szakacs; Editing by Ruth Pitchford)

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