1.    At its meeting on 20 June 2005, the Monetary Council considered the latest economic and financial developments and decided to reduce the central bank base rate by 25 basis points, from 7.25% to 7.00%, with effect from 21 June 2005.

In the Monetary Council’s judgement, inflation outlook remains favourable in the Hungarian economy and, under a forward-looking approach, a low inflationary environment is expected to persist and inflation targets are expected to be achieved. A slowdown in inflation is also facilitated by labour market adjustment and more subdued growth in consumption.

In the first few months of the year inflation was consistently below 4%. Data for inflation in May confirm that the inflation of goods that can be influenced by monetary policy has become stable at a low level. The prices of tradable goods, sensitive to changes in the exchange rate of the forint, have been declining for months. The persistence of disinflation is substantiated by the fact that the end-2004 trend of decrease in the inflation of market services has not reversed, suggesting slower growth in consumer demand. The first months of the year saw the continuation of wage adjustment in the private sector to a lower inflationary environment. The Monetary Council perceives wage adjustment as a sign of the fact that the results of disinflation are here to stay and that they have been incorporated in expectations.

Although, in the short run, the prices of goods, especially those of unprocessed food, which monetary policy can influence only to a lesser degree, pose a higher inflation risk than expected earlier, this leaves the medium-term trend in consumer prices unaffected and, thus, as regards the 12 to 18-month time horizon, the most important one from a monetary policy perspective, it does not render the attainment of the inflation target set for end- 2006 difficult.

Detailed GDP data for 2005 Q1 also confirm that the slowdown in inflation over the past 1 year was attributable predominantly to slower expansion in household consumption, which remained below GDP growth in both 2004 and 2005 Q1. Households tailor their consumption expenditure to a path that is considerably lower than earlier and is consistent with a slowdown in income growth, their rising indebtedness and higher uncertainty surrounding their prospects.

Global financial developments are likely to remain important factors in shaping the exchange rate of the forint and yields. Global willingness to take risks and associated demand for forint-denominated assets have been rather volatile over the past few months. In a longer-term comparison, however, they continue to provide a benign environment. Possible gloomier investor sentiment may, indirectly, also carry inflation risks. Economic policy commitment to mitigate domestic equilibrium risks and especially the fulfilment of what is laid down in the Convergence Programme may play a key role in reducing such risks. 

In the Monetary Council’s judgement, favourable inflation developments allow for the possibility that the base rate can be lowered by 25 basis points.

2.    The abridged minutes of the meeting are scheduled to be published at 14:00 hrs on 8 July 2005.

                                                                                    Magyar Nemzeti Bank

                                                                                        Monetary Council