The latest industrial output figure might hinder a decision to raise the required reserve ratio.

In the last quarter of 2012, industrial output increased only by 0.3 percent year-on-year, compared to 2.7 percent in the third quarter, which was believed to be the worst quarter concerning growth performance. In the first nine months of the year, average growth was 2.6 percent, substantially below the potential. The weak industrial output growth in the fourth quarter implies that year-end GDP growth rate might be around 2.3 percent. Indeed, this is a strong probability.

Uncertainties will diminish

With diminishing uncertainties in Europe and the US, risk perception has been in a steep decline. Although occasional adverse developments disturb the mood, the main trend reflects a significant reduction in uncertainties. In this environment, the confidence in the economy is expected to improve. Indeed, the numbers since December validate this. This environment is supported by the capital inflows that escalated starting in the late 2012. On the other hand, domestic interest rates are low.

Adding these up, there is no evident reason growth falling short of the targeted 4 percent in 2013 despite the stagnant industrial output in the fourth quarter of 2012. Nevertheless, there is a potential risk that might disturb the growth performance. What is more, this risk is one that concerns the Central Bank.

Before that, I would like to stress that capacity utilization rate and industrial output levels move harmoniously. Annual changes in the rates clearly reflect the correlation. Annual percentage growth rate of capacity utilization has been in decline for a long time now. Three-month averages reveal even a steeper movement downwards between October and January. In short, industrial output might have declined year-on-year also in January.

Credit growth rate

These developments might give the Central Bank a headache. Above I stressed that 4 percent growth rate in 2013 is still a realistic expectation. However, I have pointed numerously at the importance of credit growth figures for consumption and investment growth. The objective to maintain the credit growth rate at the 2012 level implied a reliance on foreign borrowing in order to boost investment expenditures that hit the bottom in 2012. In short, companies that have access to foreign funds will probably increase their investment expenditures, I argued. On the other hand, even if export performance remains weak in 2013, consumers that do not need loans for consumption can increase consumption. Therefore, 4 percent is still a realistic target, I stated.

Both the Central Bank and ministers have restated several times the objective to keep domestic credit growth rate at 15 percent. In order to lower the rate that currently floats around 20 percent, the Central Bank has raised the required reserve ratio symbolically at the latest Monetary Policy Committee meeting. People are expecting to hear decisions in this direction during the following meetings of the Committee. The latest industrial output figure might hinder such decision, however. For two reasons: first, it is quite likely that the Central Bank has already realized the risk and hence might want to wait and see. Second, it might find it difficult to explain and justify a further raise in reserve requirements. We just need to wait.

This commentary was published in Radikal daily on 12.02.2013