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Oct 06, 2016

Higher levels of inflation may not happen in Hungary even with 'extraordinary' stimulus measures

"It is clear that there are serious structural forces at play, which contribute to inflation being this low, such as globalization and changing demographic trends," the managing director of the National Bank of Hungary has said

A return to higher levels of inflation may not happen even with extraordinary stimulus measures by central banks because of structural factors such as ageing populations, Barnabás Virág, managing director of the National Bank of Hungary, has said.

"It is clear that there are serious structural forces at play, which contribute to inflation being this low, such as globalization and changing demographic trends," Virág told a conference organized by financial news website portfolio.hu.

"We have been saying for two years that we expect to reach our inflation target on a two-year horizon," Virág said.

"The Japanese have been saying this for 20 years."

Reuters reports today that faced with inflation near zero, Hungary's central bank has lowered its base rate to a record-low 0.9 percent and aims to squeeze hundreds of billions of forints out of its main liquidity tool into the economy by the end of this year. Its next policy meeting is due on October 25.

The bank has said it would not cut its base rate further but use targeted unconventional tools to ensure inflation approaches its 3 percent target, now expected around the middle of 2018.

Hungary imports low levels of inflation due to weakness in the euro zone, its main trading partner, as well as a fall in oil prices. Like many richer countries, its population is projected to fall by millions by the middle of the century based on current trends, from just below 10 million now.

Virág said these broader factors could result in sustained weaker price growth in the longer run and the return of higher inflation levels "should not be taken for granted".

Signs that structural changes are weakening central banks' influence over inflation and growth raise questions about the viability of inflation targeting, the cornerstone of modern monetary policy. The topic will be among those discussed at the International Monetary Fund's annual meeting this week.

Hungary's annual headline inflation ran at -0.1 percent in August.

Virág said the central bank hoped that its latest measure to limit the amount of funds commercial banks can park in its main liquidity instrument would also contribute to higher lending in the economy or at the very least reduce bond yields.