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Hungarian report Hungarian report
by Euro Reporter
2010-11-30 10:02:56
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Central bank raises key interest rate

Hungary's central bank raised its main interest rate from an annual 5.25 percent to 5.50 percent on Monday because of expectations of higher inflation. The bank now expects inflation to hit 4.9 percent this year, compared with an earlier forecast of 4.7 percent. In 2011, consumer prices are tipped to rise 4.0 percent instead of 3.5 percent. The announcement, which takes effect Nov. 30, marks the first time the National Bank of Hungary has raised interest rates since October 2008. Analysts had been expecting rates to remain unchanged.

"The risk is growing that expectations will be anchored not around the 3 percent inflation target, but at a significantly higher level," National Bank of Hungary President Andras Simor said after the announcement. The central bank is also forecasting higher economic growth than previously expected, with gross domestic product seen expanding 1.1 percent this year and 3.1 percent in 2011. Earlier, GDP was seen rising 0.9 percent in 2010 and 2.8 percent next year. The government was critical of the rate hike, saying it wasn't justified by the state of the Hungarian economy and the budget.

While the government led by Prime Minister Viktor Orban has committed to budget deficit limits set by the European Union, it has resorted to unorthodox methods -- including special taxes on certain sectors of the economy like banks, energy, telecommunications and retail -- to meet the strict targets, set at below 3 percent of GDP in the coming years. Last week, Economics Minister Gyorgy Matolcsy said people opting to stay in private pension funds instead of transferring to the state system would lose 70 percent of their pensions when they retire. At stake is about 2.7 trillion forints (euro9.8 billion, $13.5 billion) accumulated in individual pension accounts and managed by private pension funds. Gaining control over that money would let the government temporarily fill holes in the state budget without directly imposing austerity measures.


Hungary to nationalize pension funds

Hungary is giving its citizens an ultimatum: move your private-pension fund assets to the state or lose your state pension. Economy Minister Gyorgy Matolcsy announced the policy yesterday, escalating a government drive to bring 3 trillion forint ($14.6 billion) of privately managed pension assets under state control to reduce the budget deficit and public debt. Workers who opt against returning to the state system stand to lose 70 percent of their pension claim. “This is effectively a nationalization of private pension funds,” David Nemeth, an economist at ING Groep NV in Budapest, said in a phone interview. “It’s the nightmare scenario.”

Hungary is rolling back pension changes implemented more than a decade ago as countries from Poland to Lithuania find themselves squeezed by policies designed to limit long-term liabilities by shifting workers into private funds. Now the cost is swelling debt and deficit levels at a time when the European Union is demanding greater fiscal discipline. Hungary, the most indebted eastern member of the EU, is following the example of Argentina, which in 2001 confiscated about $3.2 billion of pension savings before the country stopped servicing its debt. The government in Buenos Aires nationalized the $24 billion industry two years ago to compensate for falling tax revenue after a 2005 debt restructuring.

Hungary failed to sell the planned amount of debt at an auction today as the forint weakened and bond yields climbed to higher than in June, when the country roiled world markets by raising the spectre of default. Yields may rise “quite significantly” as the exit of private pension funds will lead to dropping demand for local debt, Attila Eszes, a bond trader at KBC Groep NV in Budapest, said in a phone interview. “There is a huge hole in the state pension system fund,” Matolcsy told reporters in Parliament. “The government fund’s revenue from pension contributions is 900 billion forint less than its expenditure. This is unsustainable.”

The funds’ assets will be automatically shifted to the state system on Jan. 31, unless members specifically opt out. Those who decide to remain in the private funds will lose their government pension after future contributions even as the state will continue to claim 70 percent of pension contributions paid after the individual, Matolcsy said. “This is open blackmail,” Julianna Baba, president of the Stabilitas Penztarszovetseg, which groups private pension funds, said in a phone interview today. “It’s a rigged deal.”


Jobless rate 10.9% in Aug-Oct

Hungary’s rate of unemployment remained unchanged at 10.9% in the August-October period compared to the third quarter, the Central Statistics Office (KSH) has reported on Friday. The employment rate ticked up to 49.8% from 49.7% in Q3, but the participation rate was flat after a promising rise in Q3.

The jobless rate in Hungary was 10.9% in the August-October period, the same as in Q3, which compares with 11.1% in Q2 and 11.8% in Q1. The number of unemployed has dropped since Q1 by more than 32,000 to 465,600 from nearly 498,000.

The number of employed rose again compared to the base figure, now by nearly 35,000 after a 39,000 increase recorded in Q3. In the population aged 15-74, the participation rate was 55.8% in the reporting period, unchanged from the third quarter print. The rise in the indicator in Q3 (from 55.6%) was attributable not only to the cyclical improvement of the labour market but also to several measures taken in the past years that fuelled this process, the most important of which was the raising of the retirement age.

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