Hungary should keep 3 pct CPI target, cbanker says

The government, alarmed by a slowdown in economic growth, and the bank clashed on Friday as Finance Minister Janos Veres said that in the backdrop of rising global prices Hungary's inflation target was too low, while NBH Governor Andras Simor defended the goal.

Bihari, taking side with Simor, wrote in an article in the daily Nepszabadsag, that lifting the target would remove the key anchor for inflation expectations in the economy and could lead to higher inflation.

"It would be a hurried and irresponsible step to modify the inflation target in Hungary," he said.

"It's not an accident that among those countries who have had official comments (on inflation targets) since the change in global price trends it was only Turkey where the need for (changing the target) was mentioned," Bihari added.

Hungary's government and the NBH are due to review the three percent joint goal, which was originally set in 2005, in August.

Annual inflation is seen at 6.6 percent in May after a surge last year due to tax and price hikes by the government, which reduced the bloated budget deficit.

The measures led to a drastic slowdown in economic growth to 1.3 percent last year, and a slump in the popularity of the Socialist Party which has been ruling in minority since April and is struggling for survival until elections due in 2010.

The NBH has lifted interest rates in three steps by a total of 100 basis points since March to 8.5 percent, drawing criticism from top Socialist politicians who said high interest rates which kept the forint strong damaged economic growth.

Bihari said the central bank must remain committed to fight for meeting the inflation gola, while he suggested that the bank might have a pause in monetary tightening in the future.

"Actual interest rate decisions are made by the central bank based on analyzing the impact of earlier steps and incoming information," he said.

LOWER INFLATION GOOD FOR GROWTH

Bihari said changing inflation due to one-off price shocks would hit the credibility of monetary policy even if a trend of rise in global food prices is likely to last for years.

"Based on that logic (of changing inflation targets due to global price increases), if the oil price bubble bursts, the Chinese economy slows down and a general price fall follows in the markets of goods, central banks should change the inflation targets again."

"But in this case they would produce what is the worst in inflation: unpredictable changeability."

Bihari said interest rate hikes aimed at meeting the inflation goal helped rather than damaged economic growth.

"It's worth bringing inflation down to the level, even at the price of short-term growth sacrifices, at which we can reach the highest possible growth in the longer term," he said

"According to our current knowledge this level means price stability (at three percent)," he added.