Balog, who is a close ally of Governor Gyorgy Matolcsy on the bank's
policy board, said the ECB's rate cut this month and its measures to
pump money into the sluggish euro zone economy could strengthen the
forint and curb prices of imported goods.
"If, as a result, the Hungarian inflation rate declines further and
Hungarian risk premia decrease, then the room for maneuver in
Hungarian monetary policy could increase," Balog said in an emailed
reply to Reuters questions.
He also said the bank could be expected to cut its inflation
projections and raise its forecasts for economic growth in its fresh
inflation report due next week, when the bank also holds a
rate-setting meeting on Tuesday.
The bank has cut its benchmark rate to a record low of 2.4 percent
in 22 consecutive monthly steps from a 2012 peak of 7 percent to
boost economic recovery. It has left the door open to further easing
even though most other central banks in Central Europe have already
stopped cutting borrowing costs.
The expected bottom of the bank's aggressive easing cycle has moved
gradually lower and analysts believe it still has room to trim rates
to 2.2-2.3 percent.
Balog declined to say where rates could bottom out but he said
recent inflation data came in below the central bank's expectations
and economic output still fell short of its potential level, which
warranted loose monetary policy.
"Inflation sank to negative territory in the past two months and
inflation indicators signal moderate inflation pressure in the
medium term as well," he said. "These all point to loose monetary
Balog said such conditions could prevail in Hungary "for a more
The European Central Bank has cut interest rates to record lows,
launched a series of measures to pump money into the euro zone
economy, and pledged to do more if needed to fight off the risk of
Japan-like deflation. Cheap money pumped out by major central banks
encourages investors to seek higher returns in riskier asset markets
NO DEFLATION THREAT
Although some consumer prices have been falling, there is no risk of
deflation in Hungary, because the economy is growing and household
consumption demand is on the rise, Balog said.
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Hungary's annual headline inflation rate was -0.1 percent in both
April and May, mostly due to government-imposed cuts in household
Balog said the annual rate of inflation could move away from zero at
the end of the year and then could gradually approach the central
bank's inflation goal of 3 percent.
"Nonetheless, I am concerned over permanently very low inflation,
not only in Hungary but also in the euro zone, our most important
trading partner," Balog said.
"Excessively low inflation hinders economic adjustment, limits the
effectiveness of monetary policy and slows the process of reducing
While Hungary's government bond yields have dropped to record lows
on continued inflows of foreign funds into the region's assets,
helped by a strong economic recovery, the forint has weakened 3.3
percent versus the euro so far this year, underperforming the rest
of the region.
Balog said a weak forint could help exports and it has contributed
to a big surplus on the services trade balance.
"On the whole, I think that right now the depreciation of the
exchange rate could have impacts that boost growth, but like all
central bankers, I have to look at the exchange rate moves by
assessing growth, inflation and financial stability impacts at the
same time," he added.
(Reporting by Krisztina Than; Editing by Ruth Pitchford)
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