"The recent deterioration of the currency is a warning sign as a falling forint could lead to rising inflation ... we thought that inflation fall a lot more than it has done [during the beginning of the year], although the core inflation of 0.6% [year to date] is fantastic," said Ecostat's Pal Belyo.
As Belyo spoke the Hungarian forint broke 266 to the euro Wednesday morning as several days of stability proved to be temporary and the currency resumed its downward trajectory.
Over the past two weeks, the forint moved out of its previously stable range between 250-260 to the euro, as global pessimism toward emerging markets took the exchange rate as low as 266 last week before strengthening back to under 260 by last Friday. The Hungarian forint proved to be among the least resilient of emerging market currencies, weakening more and recovering less than some regional counterparts as concerns over Hungary's public finances remain key for financial markets.
Belyo however said that the forint may stabilize and possibly strengthen from present levels. Ecostat also predicts that interest rates will remain at 6.0% in 2006. The central bank has left rates unchanged for at its last five rate meetings.
Ecostat has also increased its year-end inflation prediction form 2.0% to 2.3% as figures for the beginning of the year have proved worse than expected.
Belyo said that Hungary's public finances were causing serious concern, adding that the viability of the economic manifestos of any of the parties contesting next month's general election could be judged on this basis alone. Ecostat predicts the 2006 budget deficit to be 6.8%–8.8% of GDP under the EU's ESA90 methodology, compared to an official government target of 5.0%.
"Looking at the situation objectively and realistically, steps to cut the budget deficit can not be avoided while increases in social costs can not be afforded," said Belyo.
