June 26, 2019 / 2:50 PM / 4 months ago

Risk of Hungary's booming economy overheating is very low: central banker

BUDAPEST (Reuters) - Hungary’s economy is in a high-pressure phase with strong wage and output growth, but the risk of overheating is very low as investments are booming and it is running a current account surplus, a senior central banker said on Wednesday.

A Hungarian central bank Deputy Governor Marton Nagy speaks in his office in Budapest, Hungary June 26, 2019. REUTERS/Gergely Szakacs

National Bank of Hungary deputy governor Marton Nagy told Reuters the bank was committed to reaching its inflation target over its forecast horizon of 5 to 8 quarters, which was also key to guarding against overheating.

The bank targets 3 percent inflation with a tolerance band of a percentage point on either side. But Nagy said the bank would not react automatically if tax-adjusted core inflation - the bank’s key measure - rose to 4%. It reached 3.7% in May.

“What matters is not whether it reaches the edge of the target band but the reasons why — and how that would affect the inflation outlook,” Nagy said in an interview.

The central bank left interest rates unchanged on Tuesday and said its policy would continue to be accommodative and cautious, with data in the second half of 2019 decisive in assessing the inflation outlook.

Some analysts have warned of rising inflationary pressures, with Morgan Stanley calling them “clear and widespread”.

Nagy said inflation expectations were “anchored around the bank’s target”, and that upward and downward inflation risks were at present evenly balanced.

“So there is no second-round (inflation) impact and we think that there won’t be either,” he said, adding that as a base case scenario the bank did not expect tax-adjusted core inflation to overshoot its target range.

Nagy said the bank would continue to assess data and the outlook every three months, based on the quarterly inflation report, which “has worked for us”. The next report is due in September.

A VERY FINE LINE

In the first quarter, Hungary’s economy expanded an annual 5.3% and wage growth hit double digits. But investments are also buoyant, having surged by 25% in 2018, and the budget deficit is low and net external debt is falling. Productivity was also increasing, Nagy said.

“There is a very fine line” separating a high-pressure economy from an overheated economy, Nagy said.

Overheating would be on the cards “if we had a twin deficit problem and the investment rate started to drop,” but the risk of that was “very low”, he said.

In that context the bank was also watching the current account surplus. While this had been shrinking in the past two years due to a deteriorating trade balance, it was booming investments rather than rising consumption that had led to a surge in imports, and exports remained strong.

“And if you invest, that will sooner or later ... lead to higher potential growth,” Nagy said.

Writing by Krisztina Than; editing by John Stonestreet

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