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QUARTERLY REPORT ON INFLATION MAY 2006

QUARTERLY REPORT ON INFLATION MAY 2006

MAGYAR NEMZETI BANKTable

MAGYAR NEMZETI BANKTable 4-4The MNB's main scenario versus other projectionConsumer price index (average annual increase, percentage)2006 2007MNB 2.1 3.3Consensus Economics (March 2006) 1 1.6–1.9–2.3 1.9–2.9–3.8OECD (December 2005) 2.0 2.7European Commission (autumn 2005) 2.0 3.0IMF (April 2006) 2.0 2.7Reuters survey (April 2006) 1 2.0–2.2–2.6 2.5–3.4–4.6World Bank (November 2005) 2.2 n.aGDP (annual growth, percentage)MNB 4.5 4.2Consensus Economics (March 2006) 1 4.0–4.3–4.6 3.0–3.9–4.5OECD (December 2005) 4.2 4.0European Commission (autumn 2005) 3.9 3.9IMF (April 2006) 4.4 4.2Reuters survey (April 2006) 1 3.5–4.3–4.5 2.8–3.9–4.4World Bank (November 2005) 3.8 n.aCurrent account deficit (in EUR billions)MNB 7.4* 7.7*Consensus Economics (March 2006) 1.2 6.3–7.5–8.7 5.5–7.3–8.9Reuters survey (April 2006) 1 5.9–7.2–8.1 6.4–7.3–8.0Current account deficit (as a percentage of GDP)MNB 8.3* 8.2*OECD (December 2005) 8.5 7.9European Commission (autumn 2005) 8.4 7.7IMF (April 2006) 8.2 7.5World Bank (November 2005) 8.2 n.aGeneral government deficit (according to ESA95, as a percentage of GDP)MNB 7.8-8.9** n.aConsensus Economics (March 2006) 1 5.7–7.2–10.2 4.3–6.0–8.0European Commission (autumn 2005) 4 6.7 6.9Reuters survey (April 2006) 1 7.0–8.0–9.0 5.4–6.4–7.5World Bank (November 2005) 5.7 n.aProjections on the size of Hungary’s export marketMNB 5.7 4.6OECD (December 2005) 3 6.3 7.3European Commission (autumn 2005) 3 6.0 5.9IMF (April 2006) 3 5.8 5.1Projections on the GDP growth rate of Hungary's trading partnersMNB 2.2 2.2OECD (December 2005) 3 2.1 2.4European Commission (autumn 2005) 3 2.1 2.4IMF (April 2006) 3 2.5 2.3MNB projections are so-called ’conditional’projections. Therefore, they cannot always be directly compared to other projections.1In addition to the averages of polled analysts’ responses (the values in the middle), the smallest and largest values are also indicated for the Reuters andConsensus Economics surveys in order to illustrate dispersion.2The survey specifies current account projections in US dollars, therefore they are converted at the EUR/USD exchange rate assumed in the current Report.3Values calculated by the MNB; the projections of the named institutions regarding individual countries are considered with the weights used for calculating theMNB’s own external demand indicators. This way, the forecast may differ from the numbers published by the aforesaid institutions.4For the sake of comparability the projection of the European Commission was corrected taking into account payments to the private pension fund system.* Our projection takes account of the approximately 0.5 per cent GDP-proportionate negative effect on the current account resulting from the Gripen fighter procurement.** The band indicates the uncertainty of the application of the ESA methodology in Hungary.Sources: Consensus Economics Inc. (London) Eastern Europe Consensus Forecasts (March 2006); European Commission Economic Forecasts, autumn 2005; IMFWorld Economic Outlook (April 2006); Reuters survey April 2006, World Bank EU-8 Quarterly Economic Report (November 2005); OECD Economic Outlook(December 2005).50QUARTERLY REPORT ON INFLATIONMAY 2006

4.2. Developments in general governmentdeficit indicatorsIn the course of 2006, fiscal policy will continue to easeaggregate demand (in our estimate, easing amounts toaround 0.8 per cent of GDP), which means that the broadlydefined government sector increasingly raises theincome of other economic sectors compared to 2005.The so-called augmented (SNA) balance we estimate indicatesa deterioration of around one half per cent of the balancein 2006. The underlying reason is that the effect of taxcuts was only partly offset by actual measures. The fiscaldemand impact indicator, which reflects the change in theaggregate demand of the broadly defined governmentsector, estimates the government’s aggregate demandincrease as 0.8 per cent of GDP in 2006. Developments inthe estimated general government demand in the pastperiod are illustrated in the chart below.Chart 4-3Fiscal demand impact, 1996–2006*(as a percentage of GDP)543210-1-2-3Per cent1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006* Including the lump-sum recording of the Gripen fighters expected to arrive in2006.We believe that without further balance-improving measuresduring the year, the ESA deficit of the general governmentwill not decline this year. Moreover, it may increasesignificantly compared to the preliminary actual figure for2005. The underlying reason is that the deficit-increasingeffect of tax cuts and increases in welfare expenditurescan only partly be offset by the reduction of investment andcurtailment of expenditures by budgetary institutions. Inaddition, the deficit cut planned by the government for2006 partly stems from the ‘outsourcing’ of a considerablepart of government investment to participants falling outsidebudgetary accounts.A summary of past and this year’s developments in variousdeficit indicators is shown in the table below. According toour main projection scenario, the ESA balance targetdefined by the government cannot be met without measuresto be taken by the government. The deficit is expectedto be exceeded by around 1.5 per cent of GDP, excludingthe methodological risks related to the highway constructions(line 9 of Table IV.6 contains our projectionincreased by the methodological risks; see our estimate forthe size of the risk below).Our GDP-proportionate projection for the cash-baseddeficit in 2006 has changed only slightly compared to theNovember Report, although its composition has changed.Net cash-based interest expenditure may be around 0.3per cent of GDP higher than previously assumed, and ourprojection for the deficit of the local governments has beenincreased, although the revision of GDP in the meantimeimproved the GDP-proportionate cash-based balance bynearly 0.2 percentage points.Provided that fiscal policy remained unchanged, based onthe determinants visible for 2007 and 2008, the ESA deficitwould increase by approximately 1.5 per cent of GDP by2008 compared to our main scenario for 2006. In order toattain joining the euro area in 2010 as specified in theupdated Convergence Programme, deficit reducing measuresamounting to at least 5.7 per cent of GDP should betaken in the next two and a half years (if the highway constructionexpenditure cannot be recorded statistically outsidethe general government in the future, the sameamount of additional measures will be required).Developments in deficit indicators in 2005Fiscal developments (revenues from major types of taxesand major expenditure items) in 2005 were broadly in linewith earlier Reports. Although the cash-based deficit of theQUARTERLY REPORT ON INFLATIONMAY 2006 51

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