Interview with the Governor of the National Bank

Mr András Simor was appointed Governor of the National Bank of Hungary (MNB) in March 2007. He is also Chairman of the Bank's Monetary Council.

An economist specializing in international finance, Mr Simor (54) has held senior posts at the Central Bank and leading private investment banks. He was also elected Chairman of the Board of the Budapest Stock Exchange and Chairman and Office Managing Partner of Deloitte Hungary. In spite of an excellent reputation in international financial circles, Mr Simor has a relatively low profile in Hungary. However, as Hungary has joined the EU and plans to adopt the community’s currency monetary decisions, his focus is on the interaction between the global environment and national aims.

Hungary’s currency, the forint, has strengthened spectacularly during recent months. What can we expect for the near future?

On February 26, 2008, the Monetary Council agreed with the Government to introduce the free float of the forint against the Euro. The floating exchange rate system offers more favorable conditions for the National Bank to achieve its inflation target and meet the nominal criteria of the Maastricht Treaty. In the first four months of 2008, the forint moved between the range of 250 and 267 to the Euro. The forint began to further strengthen in May 2008, reaching 230 to the Euro by July. Where a fixed exchange rate exists, price levels approach parity in developing economies by way of inflation levels - and wage growth - above those of more developed countries. By contrast, the current floating exchange rate allows part of this process to be offset by the nominal appreciation of the currency. Of course, this in no way guarantees greater exchange rate predictability in the future, as productivity growth can be very volatile.

Adoption of the Euro is a hot topic. There are pro and counter reasons for following the general procedures. How is the National Bank involved, what type of obligations does the Bank have?

All members of the European Union, with the exception of Denmark, Sweden and the UK, have agreed to adopt the Euro as soon as possible. When she joined, Hungary - like the other member states - took on this responsibility. We keep our word and the Euro will be introduced once the necessary requirements [i.e. the Maastricht criteria] have been fulfilled.

The Hungarian National Bank’s cost-benefit analysis published in 2002 revealed that the advantages of Euro adoption considerably outweighed the costs. The report anticipated an increased rate of growth in the long term and accelerated narrowing of the wage gap [real convergence]. Based on this evidence, the Euro should be adopted as soon as possible. Of course, the process is not without risk, as several poorly performing Euro zone countries have shown. The Hungarian National Bank, however, is confident that Hungary’s strong economic and export structure,  flexible labor market and close trade ties to core member states will stand it in good stead to invalidate these concerns.

Could you name the priorities  of the National Bank at the moment?

Long-term price stability is the National Bank’s most pressing and important goal. However, efforts to curb inflation are hindered by cost shocks fuelled by domestic and international factors, while economic growth will be slow to pick up. By raising base rates, the Monetary Council has attempted to ease the second-round effects of persistently high inflation and long-term expectations thereof. But whether expectations of inflation are being kept in line with actual price stability is questionable. This represents a risk as we cannot rely on a negative output gap to be sufficient to induce disinflation. With this in mind, it is important to prevent expectations of inflation from remaining permanently high.

 

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