He said the break-up with the lender has no direct impact on monetary policy. Simor held a conference talk with UniCredit Bank on Thursday, which gave analysts the impression that the NBH is likely to follow events instead of reacting proactively. Gyula Tóth, economist at UniCredit in Vienna, gave the following account of the conference talk.

Monetary policy implications of the suspension of the IMF/EU talks

The NBH does not see any direct impact on monetary policy from the break-up, Simor said at the conference talk. He noted, though that should the risk premium increase on the HUF and bonds, this could influence the inflation target.

"So far the impact is relatively muted and the impression is that the NBH is in a wait-and-see mode," Tóth added. In Simor’s view, the talks have broken up due to lack of visibility on the 2011 target, lack of structural fiscal measures and some direct conflict with EU laws. Although the latter was not specifically mentioned Tóth believes Simor meant the salary cap and the new levy on the financial sector.

Does Hungary need an IMF agreement?

Simor highlighted that the last time the country drew funds from the IMF and EU was in Sept 2009, and "there are no near-term funding needs," Tóth said. Hungary "at the moment is fully financing itself from the markets and, hence, the agreement would be beneficial as a safety net in case global markets were to deteriorate," Tóth cited Simor as saying.

What are the impacts of the bank tax?

The profitability of the Hungarian banking sector is very high vs. the EU banking sector but not too high vs. other CEE banking sectors. The tax will likely half the profitability of the banks, Simor opined. Given the loan-to-deposit ratio is still around 140% a significant amount of Hungarian banks are still heavily relying on the parent banks, Simor noted. He believes the tax may divert their activity from Hungary to other countries. The NBH expects credit conditions to tighten as a result.

Simor more relaxed about FX

The Governor noted that the present situation is significantly better than in the fourth quarter of 2008, as banks have built up liquidity buffers. Due to the significant profit of the banking sector in 2009 the capital buffer of this sector is much higher than in 2008, he added.

The NBH’s own stress test (GDP falling 2.5% and EUR/HUF at 310) showed the banking sector is well capitalized. "Accordingly, Simor sounded much more relaxed about the FX rate than 1.5 years ago," Tóth said.

Simor on the inflation outlook

The Governor reminded that the latest inflation projection was based on 265 EUR/HUF (rule base forecast) and in this regard, the current exchange rate definitely represents upside risk.

On the other hand, he added that core inflation has moved downward in the past couple of months whilst the base effect from last year is very supportive.

Asked about a specific FX level, Simor said risk assessment and inflation outlook have roughly equal weight in the NBH’s thinking.

UniCredit’s conclusion

The NBH "sounded much more relaxed about the FX rate than 1.5 years ago and it also focused on downward pressure on inflation," Tóth said.

"This and the fact that the CenBank is not really involved in fiscal issues (and IMF/EU talks) means the NBH will likely follow events instead of reacting proactively. This suggests that upside scope in EUR/HUF still exist whilst the rate would only follow suit in the case of a more meaningful weakness."

Source: Portfolio Online Financial Journal