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Capital Markets

Muddling through deficit troubles

Hungary's economy is growing well, with relatively low unemployment and high foreign direct investment. But the government budget deficit is running far above EU criteria and there are divided counsels on how to control it.

Riding the wave of FDI

A BATTLE HAS broken out for control of Hungary's monetary policy. The prime minister, Ferenc Gyurcsany (pictured), and the finance ministry want to lower interest rates and work towards a weaker currency to boost growth; the central bank, the National Bank of Hungary, wants to maintain a tight monetary policy to control inflation and help reduce a gaping hole in public finances. The battle involves the nomination of candidates to Hungary's monetary council, which makes key decisions on interest rates, among other things. Gyurcsany has been lobbying with little luck for more than two years to get individuals sympathetic to his views on the council.

The tussle came to a head at the start of March with a victory for Gyurcsany. Four new members were elected to the monetary council, which was expanded from nine members to 13 to accommodate them.

"The prime minister got his way and four more people are now on the board, but as all four are well-respected economists and academics the market is not expecting them to cut key interest rates aggressively as they are aware the results could be destabilizing if they get it wrong," says Mihaly Bokor, senior bond trader at ING in Budapest.

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