BUDAPEST, Feb 10 (Reuters) - Hungary's inflation and GDP trends would allow more interest rate cuts but the central bank must also watch risks to financial stability, mainly wild swings in the forint, a central banker said on Tuesday.
'We think that on the basis of the inflation outlook and prospects in the real economy there would be room for further steps on interest rates. However, we must also remain cautious in order to ensure that the risks to financial stability ... remain manageable,' Deputy Governor Ferenc Karvalits said.
'From the aspect of financial stability, a significant concern can be the impact of a sustained shift in the exchange rate on loan portfolios,' Karvalits told reporters on the sidelines of a conference.
The bank has cut rates by 200 basis points in four steps since November, reversing part of a 300 basis point emergency rate rise in October which helped to stabilise the falling forint. It will hold its next rate setting meeting on Feb. 23.
Karvalits said liquidity in markets in Europe and Hungary has improved since October, but the volatility of the forint exchange rate had increased in the past weeks.
'It is the volatility of the exchange rate that can be a concern for members of the (Monetary) council,' he said. 'In the past one and a half months this has been increasingly affecting emerging markets; the impacts of deleveraging are stronger and stronger in the region,' he said.
The forint hit record lows beyond 300 per euro in the few past weeks before recovering to around 290 this week. But analysts in a Reuters poll said further weakening of central European currencies was likely before a slow rebound in the second half of this year.
A weaker currency can help exports and economic growth. However, significant and sustained weakness can lead to defaults on foreign currency loans taken out by Hungarian households in the past few years, and damage to commercial banks' portfolios.
Karvalits said Hungary's economic output may fall more than 3 percent this year, much more than the bank's forecast of a decline of up to 1.7 percent, made in its inflation report released in November.
He told the conference that a rise in foreign currency debt in this decade left the country vulnerable and it needed deep reforms to overcome the current crisis on top of short-term savings measures considered by the government.
'A very painful and tough period is ahead,' he said.
(Reporting by Gergely Szakacs and Sandor Peto, editing by David Stamp) Keywords: HUNGARY RATES/ (gergely.szakacs@thomsonreuters.com; +36 1 327 4748; Reuters Messaging: gergely.szakacs.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
'We think that on the basis of the inflation outlook and prospects in the real economy there would be room for further steps on interest rates. However, we must also remain cautious in order to ensure that the risks to financial stability ... remain manageable,' Deputy Governor Ferenc Karvalits said.
'From the aspect of financial stability, a significant concern can be the impact of a sustained shift in the exchange rate on loan portfolios,' Karvalits told reporters on the sidelines of a conference.
The bank has cut rates by 200 basis points in four steps since November, reversing part of a 300 basis point emergency rate rise in October which helped to stabilise the falling forint. It will hold its next rate setting meeting on Feb. 23.
Karvalits said liquidity in markets in Europe and Hungary has improved since October, but the volatility of the forint exchange rate had increased in the past weeks.
'It is the volatility of the exchange rate that can be a concern for members of the (Monetary) council,' he said. 'In the past one and a half months this has been increasingly affecting emerging markets; the impacts of deleveraging are stronger and stronger in the region,' he said.
The forint hit record lows beyond 300 per euro in the few past weeks before recovering to around 290 this week. But analysts in a Reuters poll said further weakening of central European currencies was likely before a slow rebound in the second half of this year.
A weaker currency can help exports and economic growth. However, significant and sustained weakness can lead to defaults on foreign currency loans taken out by Hungarian households in the past few years, and damage to commercial banks' portfolios.
Karvalits said Hungary's economic output may fall more than 3 percent this year, much more than the bank's forecast of a decline of up to 1.7 percent, made in its inflation report released in November.
He told the conference that a rise in foreign currency debt in this decade left the country vulnerable and it needed deep reforms to overcome the current crisis on top of short-term savings measures considered by the government.
'A very painful and tough period is ahead,' he said.
(Reporting by Gergely Szakacs and Sandor Peto, editing by David Stamp) Keywords: HUNGARY RATES/ (gergely.szakacs@thomsonreuters.com; +36 1 327 4748; Reuters Messaging: gergely.szakacs.reuters.com@reuters.net) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.