BUDAPEST (Reuters) - Hungary's finance minister said on Friday the country's 3 percent medium-term inflation target was too low, but the central bank governor responded by saying changing it would destroy monetary policy credibility.
The clash between Finance Minister Janos Veres and central bank (NBH) chief Andras Simor renewed tension between their two institutions who are due to review the joint inflation target beyond 2009 in August.
Central bank interest rate hikes to fend off rising inflation, which reached an annual 6.6 percent in April, have angered politicians in the Socialist Party, which rules in a minority.
'I dispute, or at least find questionable 3 percent even as a theoretical target as it was set by the European Monetary Union when inflation in the euro zone did not reach 2 percent,' Veres told private broadcaster Gazdasagi Radio.
'Today, euro zone inflation will clearly exceed 3 percent. In this period it would be completely unrealistic to expect 3 percent as an inflation target (in Hungary),' Veres said.
But Simor said Hungary should not change its target simply because of a global rise in inflation.
'It would not be practical to modify our medium-term target aimed at anchoring (inflation) expectations, referring to factors which can later prove temporary,' Simor told Reuters. 'That would destroy the credibility of monetary policy.'
The central bank has raised interest rates by a total of 100 basis points since March to 8.5 percent, saying it was defending the inflation target. The Socialists say high interest rates damage economic growth.
Simor on Thursday warned that the fight against inflation will be drawn out, risking inflationary expectations getting stuck at a high level and jeopardizing the inflation target even in 2010.
Hungary's annual economic growth of 1.7 percent in the first quarter lagged well behind regional peers after tax and price hikes by the government to cut the bloated budget deficit.
Simor said on Friday that the best way for the central bank to serve economic growth was fighting to reach price stability.
He said a global rise in inflation may not be lasting, and the European Central Bank, a benchmark for Hungary, was also fighting to push back inflation to price stability.
'The inflation target (set in 2005) must be reviewed every three years, but if no factor emerges which would significantly change the definition of price stability, the earlier target remains valid,' he said.
The central bank has won the trust of markets with its determination to hike rates and last week the two sides appeared to have agreed that the bank should target 3 percent precisely rather than 3 percent plus/minus one percentage point. tf.TFN-Europe_newsdesk@thomsonreuters.com pjg/rw COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
The clash between Finance Minister Janos Veres and central bank (NBH) chief Andras Simor renewed tension between their two institutions who are due to review the joint inflation target beyond 2009 in August.
Central bank interest rate hikes to fend off rising inflation, which reached an annual 6.6 percent in April, have angered politicians in the Socialist Party, which rules in a minority.
'I dispute, or at least find questionable 3 percent even as a theoretical target as it was set by the European Monetary Union when inflation in the euro zone did not reach 2 percent,' Veres told private broadcaster Gazdasagi Radio.
'Today, euro zone inflation will clearly exceed 3 percent. In this period it would be completely unrealistic to expect 3 percent as an inflation target (in Hungary),' Veres said.
But Simor said Hungary should not change its target simply because of a global rise in inflation.
'It would not be practical to modify our medium-term target aimed at anchoring (inflation) expectations, referring to factors which can later prove temporary,' Simor told Reuters. 'That would destroy the credibility of monetary policy.'
The central bank has raised interest rates by a total of 100 basis points since March to 8.5 percent, saying it was defending the inflation target. The Socialists say high interest rates damage economic growth.
Simor on Thursday warned that the fight against inflation will be drawn out, risking inflationary expectations getting stuck at a high level and jeopardizing the inflation target even in 2010.
Hungary's annual economic growth of 1.7 percent in the first quarter lagged well behind regional peers after tax and price hikes by the government to cut the bloated budget deficit.
Simor said on Friday that the best way for the central bank to serve economic growth was fighting to reach price stability.
He said a global rise in inflation may not be lasting, and the European Central Bank, a benchmark for Hungary, was also fighting to push back inflation to price stability.
'The inflation target (set in 2005) must be reviewed every three years, but if no factor emerges which would significantly change the definition of price stability, the earlier target remains valid,' he said.
The central bank has won the trust of markets with its determination to hike rates and last week the two sides appeared to have agreed that the bank should target 3 percent precisely rather than 3 percent plus/minus one percentage point. tf.TFN-Europe_newsdesk@thomsonreuters.com pjg/rw COPYRIGHT Copyright Thomson Financial News Limited 2008. All rights reserved. The copying, republication or redistribution of Thomson Financial News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Financial News.
© 2008 AFX News
