HIGHLIGHTS-Hungarian rate-setters on policy outlook

BUDAPEST, Oct 1 (Reuters) - Following are highlights of a joint Reuters interview with Hungarian central bank rate-setters Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky conducted on Monday.

For main story, see BARTFAI-MAGER

"There was significant debate within the Monetary Council on two issues: whether there is a risk that the cost-side shocks will induce a sustained cost-price spiral in the recession-hit economy. I think this is not the case.

"Another issue is whether the decline we are seeing in the economy is a trend or is it of a cyclical nature. I think we see it as a cyclical story.

"We have made a decision according to a risk scenario called the more favourable potential GDP path in the inflation report. This path carries the message that the inflation target can be reached with looser monetary conditions.

"As is customary in the inflation report, this is not a quantitative signal as to how many basis points worth of reductions can be expected, but rather a qualitative message revealing neither the timing nor the extent (of easing).

"Views of Monetary Council members can and may differ on this.

"I was surprised that apart from the usual qualitative message, the governor had also sent a quantitative message to the markets.

"Government tax measures and cost shocks keep inflation high. However, in my view, these could be wrestled down only at an unnecessarily high cost to the real economy.

"The debate revolves around whether there will be second-round impacts or not and whether weak demand has a disinflationary impact.

"My personal view is that in an environment where unemployment is high, economic growth is slow for a sustained period and the outlook for growth is also weak, the second-round impacts of price shocks should not be overestimated.

"That is, weak demand can bring down inflation to the target on the horizon where monetary policy has an impact.

"We have not abandoned either the inflation targeting regime, or the inflation target. These are very important signals that the market should reckon with.

"In this very complex situation, we can make progress once newer and newer data start coming in, which replace the estimates of experts with facts, which will enable us to reassess what is happening in the economy.

"In my coming decisions the notion that inflation-targeting monetary policy is successful only if it does not require unnecessary sacrifices from the economy but is able to achieve its objective in a sustained way will be of defining importance.

"What we are doing now is an extremely cautious rate-cutting cycle."

"Supporting (economic growth) cannot trump our legal obligation, which is that the MNB is responsible to reach and maintain price stability. The other legal obligation is that the MNB determines the conduct of monetary policy.

"The European Central Bank employs the regime of inflation- targeting and it has a mandate to reach its inflation target. This is the framework that Hungarian monetary policy can think in.

"Our current (September) decision does not impair either the regime of inflation targeting, or the inflation target.

"Our key message about cautious monetary policy has not changed. We will obviously follow market reactions."


"Inflation-targeting as a methodology has not been questioned for one second. This is not the case.

"However, there are differences in the approach.

"Inflation, if there is any, appears only when a purchase is made. The real economy cannot be subtracted from this story.

"If we look at Europe, we have ample room. Just look at the next highest interest rate level after 6.5 percent.

"We need to monitor what opinion the economy and the market develops with regard to what is happening in Hungary, both in the economy and in terms of economic policy. External factors are also extremely important.

"Let us not forget that the country has a rather handsome debt pile. This should be slimmed down somehow. But you cannot reduce it if the economy is not growing. And it cannot grow if the forces acting against it outnumber the positive factors.

"We cannot disregard these factors notwithstanding that our main task is to preserve the value of the currency and fight against inflation."


"The three of us agree that compared with the baseline scenario the output gap remains large and it is widening and this obviously has an impact on the interest rate decision.

"The 25 basis point (reductions) will not help overnight, but will help in the long run."

(Reporting by Sandor Peto and Gergely Szakacs)

((gergely.szakacs@thomsonreuters.com)(+36 1 327 4748)(Reuters Messaging: gergely.szakacs.thomsonreuters.com@reuters.net))