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The Monetary Council’s press release on the inflation target

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23 August 2011

Following the latest triennial revision, the Monetary Council has decided to maintain the MNB’s inflation target at 3% as measured by the increase in the consumer price index published by the Central Statistical Office. In line with past practice, the Bank will make available its annual assessment of performance in meeting the inflation target in its Annual Report.

The primary statutory objective of the Magyar Nemzeti Bank is to achieve and maintain price stability. To this end, the Bank has operated an inflation targeting regime since the summer of 2001. The MNB can contribute to long-term sustainable economic growth by delivering and maintaining price stability. Price stability means that economic agents can reasonably expect that inflation at longer horizons will remain low and stable. Price stability does not mean close to zero inflation - excessively low inflation may also pose risks to the economy. The 3% inflation target i) is sufficiently low to ensure that economic losses associated with inflation remain moderate, ii) takes into account potential statistical distortions arising from the method of calculating the consumer price index and iii) adequately reduces the risk of future episodes of deflation.

In setting the inflation target, the Monetary Council considered Hungary’s prospective entry into the euro area. Euro adoption offers many advantages; however, the experiences of some euro-area periphery countries highlight a number of potential risks. If domestic inflation expectations are not in line with the euro-area inflation target before accession, there will be a greater probability of an excessive real exchange rate appreciation, a deterioration in competitiveness and an undue expansion of bank credit. Risks can be mitigated by achieving as much nominal convergence as possible before the country joins the euro area.

The Monetary Council therefore places great emphasis on bringing inflation into line with the 3% inflation target; and the Council may decide to lower the inflation target in the medium term.

The Government’s economic policy may contribute to delivering and maintaining price stability through several channels. Reducing the fiscal deficit and debt, and setting tax rates and administered prices in line with the 3% inflation target may help reduce the real economic costs of achieving and maintaining medium-term price stability.

The next revision of the current inflation target will take place at the latest three years from now or at the time Hungary joins the European exchange rate mechanism (ERM II). However, the target may be reduced prior to that date, if the Monetary Council judges that such a move promotes economic convergence with the euro area.

MAGYAR NEMZETI BANK

Monetary Council