BUDAPEST: The monetary authorities here said Monday that Hungary would abandon a trading band on its currency, the forint, allowing it to float freely against the euro beginning Tuesday.

The National Bank of Hungarys surprise decision will eliminate the current exchange rate system, in which the forint was kept within a band of plus or minus 15 percent against the shared European currency.

The bank said the move was an important step in Hungarys aim to switch to the euro and would provide the bank more favorable conditions to get inflation under control. The current exchange rate system “does not contribute to anchoring long-term inflation expectations,” the central bank said in a statement announcing the new system.

The bank said its decision to introduce the new exchange rate system was made in agreement with the government.

Hungary has not set an official date for adopting the euro, but many analysts say 2014 is realistic.

Target dates announced earlier - which considered introducing the euro even before 2010 - were repeatedly scrapped as Hungarys economic performance and its macroeconomic indicators deteriorated.

To enter the so-called European Rate Mechanism II, the unions official two-year waiting room for euro hopefuls, a country must not exceed limits to its state budget deficit, inflation rate and debt level - conditions known as the Maastricht criteria.

While the central bank had forecast inflation to drop to an annual 3 percent by the second quarter of next year, it said that target now appears unattainable.

The central bank also said Monday that it was leaving its key interest rate - the two-week deposit rate for commercial banks - unchanged at an annual 7.50 percent.

This entry was posted on Monday, February 25th, 2008 at 9:49 pm While Dave was in Money. Responses are currently closed, but you can trackback from your own site.