andras simor : anchor 2013 speech by mr andras simor, governor of magyar nemzeti bank ( the central bank of hungary ), at the anchor 2013 conference, budapest, 7 december 2012. * * * ladies and gentlemen, two statements, three proposals : these will be the main points of my speech today. let me begin with the first statement. first statement : predictability and stability are required for growth let us try to imagine that hungary is a successful country once again. admittedly, this is no easy feat as we enter the fifth year of the crisis. still, let us toy with the idea. what does success mean in economic terms? it means at least three things. if you want to work, you can find a job. your income increases. and last but not least, you need not worry about inflation, or your savings losing their value. in other words, success also requires price stability. every country that we can consider as a model has price stability. even where inflation is not on target at present, monetary policy has managed to create a persistently low inflationary environment, which ensures that the expectations of economic agents are well anchored. price stability is not the luxury of rich countries, it is a prerequisite for growth. price stability is an indispensable component of a predictable economic environment where it is worth investing and creating jobs. when prices are stable, the highest rate of economic growth can be reached over the longer term, not only in developed countries but also in emerging ones. however, in addition to price stability, growth also requires predictability in terms of laws, regulations, taxes, that is, the predictability and stability of the entire regulatory environment for businesses. second statement : hungary has a severe growth problem, which cannot be remedied by fiscal and monetary stimulus. what is more, the recovery from the debt trap is hindered not only by the adverse international environment, but also by a complex crisis of confidence. hungary ’ s potential growth already slowed down before the crisis, and the process of catching - up with the euro area halted close to a decade ago. before the crisis, analysts mostly blamed the problem on the long - term unsustainability of the budget and the disincentives prevalent in the labour market. the tax wedge, which was excessively high compared with other countries of the region, the welfare benefits system, which was too generous for our level of development, and tax evasion due

of money markets as soon as possible. after the acute stage those risks abated, even though the high level of debt and the volatile risk environment continues to demand great care in the implementation of monetary policy. on the other hand, the decisions of the central bank may gradually return to normal, as inflation and growth prospects come into focus again. what are the current dilemmas of monetary policy? at the beginning of the crisis, we saw that the protracted recession upset all of the price and wage - setting routines that had led to the stubborn inflation of previous years. disregarding bis central bankers ’ speeches the effects of tax increases and commodity prices, hungary has as low rate of inflation as its neighbours. price stability, however, is not merely a question of the level of inflation today ; rather, it depends on what economic agents think about future inflation. even though demand continues to be subdued, we think that the disciplined price and wage - setting behaviour which the private sector has exhibited in the past two or three years is beginning to loosen up, and analysts ’ longer - term inflation expectations have also risen. it is to be feared that – as a result of the repeated additional price rises due to a sequence of tax measures, rising commodity prices and soaring food prices – economic agents will consider an inflation rate considerably above the target to be normal. in such a situation, it is very difficult to assess the level at which inflation will settle when the extra price increase generated by the government no longer has an effect. the various answers to this question also contribute to the division in the monetary council. in my opinion, when inflation expectations, i. e. the longer - term inflation outlook, become uncertain, the central bank should act much more firmly to keep price and wage - setting behaviour disciplined. why is price stability important now? some think that – regardless of the answer to the question of whether the high inflation will “ fall or stick ” – the central bank must abandon its rigid stance and give priority to growth. this is a peculiar idea in a country where economic policy in the past two decades has always seen the solution in inflating away macroeconomic problems, without any tangible improvement in growth, i might add. indeed, we had to learn the hard way that even though leniency on inflation may appear attractive in the short term, it has never produced any welfare gain. by contrast, our neighbours – who have created price stability with consistent and tight monetary policy and a supportive fiscal policy – are leaving us