* Hungary central bank likely to slash 2009 growth forecast
* Budapest to ask EU for relief on cutting fiscal deficit
* But Czechs urge bloc to stay within EU fiscal rules
By Balazs Koranyi and Gergely Szakacs
BUDAPEST, Oct 14 (Reuters) - Hungarian officials said they
would cut 2009 economic growth forecasts and the government said
on Tuesday it would call for the European Union to relax budget
rules to help shield it from the economic crisis.
A day after the International Monetary Fund offered Budapest
financial and technical aid, Hungary's central bank said a badly
needed economic recovery could stall with growth of less than 1
percent in 2009, from an earlier projected 2.6 percent.
But Hungary was quick to respond to the IMF's offer to say
any help from the Fund would be used only as a last resort.
The news followed data showing the European Union member's
inflation rate had eased to a two-year low in September, which
analysts said would usually lead to lower interest rates but
would probably be greeted with caution due to market volatility.
Hungary, one of ex-communist Europe's economies most exposed
to the financial crisis because of high foreign currency debt
and loan-to-deposit ratio, saw its stocks and currency hammered
last week due to rumours over the health of its banking system.
Policymakers and banking officials have since rushed to
assure investors that the country's banks are well-capitalised
-- helping markets recover this week -- but the government has
also taken steps to shore up the system.
On Tuesday, Prime Minister Ferenc Gyurcsany also said
Budapest would ask the European Union to modify its rules
requiring member states to reduce their budget deficits, even if
they are below the 3 percent criteria for euro zone membership.
"We will propose to the Union that in a period of recession,
like the one we are facing now, if someone has met the 3 percent
deficit level, while staying below that threshold, they should
be relieved of further deficit reduction obligations," he said.
Such a call may not sit well with some EU states. In
Brussels, the Czechs urged the bloc to stick to the rules "even
in difficult situations" and warned of possible spillover
effects if larger states started taking ad-hoc measures.
Most analysts agree public spending has been a millstone
around Hungary's neck for most of this decade.
Huge cuts to bring it under control since 2005 -- Hungary is
now targeting a budget deficit of 2.9 percent of GDP for 2009,
from 3.4 percent this year -- have caused it to lag its regional
peers in growth and allowed it to expand only slowly this year.
In comparison, the Czechs are aiming for a deficit of 1.6
percent of GDP, and the Poles 2 percent.
GROWTH SUFFERS, PRICE PRESSURES EASE
Aside from ripples from the credit crisis, a more tangible
problem that has hammered exports across central and Eastern
Europe is the collapse of demand from the region's main export
customer -- the euro zone -- which has hit producers in the
industry heavy region and walloped growth.
Gyurcsany said the slowdown had helped take some air out of
racing price growth, which had prompted the central bank to
raise interest rates to 8.5 percent earlier this year.
The September data showed the figure easing to a two-year
low of 5.7 percent.
But, following a closed-door meeting with central bank and
government officials, a senior government source said the
outlook for growth would also be scaled back.
"The central bank governor addressed the meeting and said
that he would be surprised if the bank's new projection, to be
released in the November inflation report, would be above 1
percent," the source, present at the meeting, told Reuters.
The source also said the governor had said the bank would
lower its 4.1 percent end-year 2009 inflation projection,
largely due to a quick drop in the prices of food and fuel.
The figures came as positive surprise for markets and should
ease pressure on the central bank, which has been struggling to
contain inflation but the current market volatility is likely to
prevent the bank from cutting rates in the short term.
"Risks to the forint from a slowdown in foreign exchange
borrowing are likely to keep the central bank cautious for now,
but given rising risks of a recession in Hungary next year and
the increasingly benign inflation outlook, we think that a rate
cut is likely to be on the cards early next year," JPMorgan
economist Nora Szentivanyi said.
(Writing by Michael Winfrey; Editing by Andy Bruce)
