UPDATE 1-Hungary cbank to cut CPI target from 2012

BUDAPEST, Nov 12 (Reuters) - Hungary's central bank is committed to cutting inflation to its 3 percent target from 2012, the bank's deputy governor said on Friday, adding that households' consumption would take some time to recover. "Unfortunately we see that the government consistently ... forecasts inflation above the 3 percent target, which means they think we will never achieve it," Ferenc Karvalits told a business meeting. "This unfortunately does not help the credibility of this target," he said. "We are committed to reducing inflation to this 3 percent target from 2012." Hungary's headline inflation rate rose to 4.2 percent in October on the back of a sharp increase in food prices. The government forecasts inflation above the bank's 3 percent target in the coming years. Karvalits said an indefinite extension of new windfall taxes on the financial, energy, retail and telecommunication sectors could also boost price pressures in the economy if companies begin to factor them into their prices. The bank will publish its next update on inflation later this month, which will be based on stronger exchange rates and lower oil prices than its previous report issued in August, the bank's governor, Andras Simor said on Thursday. Karvalits added that a recovery in household consumption would be more protracted than elsewhere in central Europe due to the large stock of foreign currency debt in the sector after a borrowing spree, mainly in Swiss francs, before the crisis. Most household loans were taken out at levels of around 150-160 forints versus the Swiss franc compared with around 208 on Friday, triggering a sharp rise in loan defaults and mounting repayments for hundreds of thousands of families. "Households want to exit, escape from debt, therefore, the proportion of household savings have increased dramatically during the crisis," Karvalits said. He said the level of household savings had risen to about 4-5 percent of gross domestic product from virtually zero before the crisis and consumers were likely to remain tight-fisted until loan repayments decline to lower levels. "As long as the proportion of loan repayments remains above 10 percent of available income, households will likely opt for savings instead, lending activity will be subdued and, as a result, consumption will expand more slowly," Karvalits said. "Therefore, a recovery in consumption will be much slower than for example in the Czech Republic." Hungary's economy grew by a higher-than-expected 1.6 percent in the third quarter year-on-year, partly due to a modest recovery in consumption. The government expects household consumption to rise by 2.6 percent next year, helped by a planned cut in personal income taxes, which will mostly benefit high-income earners and big families. (Reporting by Gergely Szakacs; Editing by Giles Elgood) Keywords: HUNGARY INFLATION/ ([e-mail]; [phone]; Reuters Messaging: [e-mail]) COPYRIGHT Copyright Thomson Reuters 2010. All rights reserved.

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