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THE MONETARY COUNCIL’S STATEMENT IN THE DECEMBER 2013 ISSUE OF THE QUARTERLY REPORT ON INFLATION

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17 December 2013

At its meeting on 17 December 2013, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 20 basis points from 3.20% to 3.00%, with effect from 18 December 2013.

Since August 2012, the Monetary Council has reduced the base rate significantly


The reduction in the base rate was justified by the low inflation environment, subdued inflationary pressures over the medium term and a degree of spare capacity in the economy. Perceptions of the risks associated with the economy were supportive throughout the period. In the Council’s judgement, the significant reduction in the base rate implemented since August 2012 contributed to the recovery in domestic economic growth and enabled the Bank to meet its medium-term inflation target. The Council is seeking to maintain a balanced and conservative approach to monetary policy. In addition to the priority of meeting the inflation target, the Council also takes into account the condition of the real economy and incorporates financial stability considerations into its decisions. A marked and sustained shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy.

In the Council’s judgement, there is no material inflationary pressure in the Hungarian economy


In recent months, the consumer price index and the measures of underlying inflation have been at historically low levels. Low underlying inflation reflects the combined effect of weak domestic demand, declining inflationary pressures in external markets and the gradual adjustment of inflation expectations. In addition to the decline in underlying inflation, the reductions in regulated prices, implemented in a series of steps this year, have also contributed significantly to the development of a low inflation environment.

Looking forward, loose labour market conditions and the adjustment of inflation expectations are likely to lead to moderate wage growth, which in turn may contribute to the maintenance of the low inflation environment. On the whole, inflationary pressures are likely to remain muted over the medium term, with inflation expected to move into line with the target by the end of the forecast period.

The Council judges that the Hungarian economy returned to a growth path in 2013 and, looking ahead, expects economic growth to continue

Hungarian economic growth may continue in a more balanced pattern than previously. Rising exports are likely to play an important role as a source of growth, supported by an increase in market share due to the establishment of new production capacity in the automobile industry, in addition to the recovery in external activity. Moreover, domestic demand is expected to strengthen in the coming years. Whole-economy investment is likely to pick up further, bolstered by the increasing use of EU funding. Corporate investment is expected to grow, driven by the positive economic outlook and the easing of credit constraints due to the Bank’s Funding for Growth Scheme. However, household consumption is likely to grow only gradually, even despite the increase in real income. Propensity to save is expected to remain high, reflecting the ongoing reduction in debt built up during the years prior to the crisis and the slow improvement in credit conditions.

Hungary’s external position is likely to improve further


The external surplus of the Hungarian economy is likely to rise further this year, reflecting a rising surplus on goods and services partly due to the improvement in the terms of trade, the expected moderate decline in the income account deficit and the increasing use of EU transfers. On the forecast horizon, the external financing capacity is expected to remain high and the trade surplus to stabilise at its current level, while the net amount of EU transfers, although falling slightly, is likely to exceed the level of previous years, due to the new budget cycle of the EU. With the external financing capacity remaining high, the external debt ratio is likely to fall further, which in turn will reduce the country’s vulnerability.

In the Council’s view, the medium-term achievement of the price stability and the condition of the real economy provide scope for further cautious monetary policy easing

In the Council’s judgement, the economic data becoming available in the course of the year indicate that weak domestic demand and loose labour market conditions have a strong disciplinary effect on economic agents’ price and wage-setting decisions. Although temporary effects have also contributed strongly to the reduction in inflation, underlying developments point to continued moderate inflationary pressure even in the medium term, supported by low inflation in external markets and the gradual fall in inflation expectations. The productive capacity of the economy continues to be lower than optimal, with the output gap remaining negative. The negative output gap may close at the end of the forecast horizon, mainly driven by the performance of the export sector and the revival of investment. On the other hand, household consumption is likely to strengthen only gradually and, consequently, real economic factors are expected to continue to have a disinflationary impact, although to a declining extent. Under the current projection, inflation remains significantly below the target next year, before moving into line with the rate of change consistent with price stability in 2015, even as the output gap closes. The low inflation environment may help the Bank’s inflation target to better anchor the nominal path of the economy.

On the whole, the global financial environment has been supportive in the past quarter. However, sentiment has been volatile, due to uncertainty about the future of unconventional measures used by global central banks, which warranted an even more cautious approach to domestic monetary policy.

The macroeconomic outlook continues to be surrounded by a range of uncertainties


The Monetary Council identified several alternative scenarios around the baseline projection in the December Report. Two of these scenarios represent risks relevant to the future conduct of monetary policy. In the Council’s judgement, the alternative scenarios allowing for the possibility of a lower inflation environment, on the one hand, and a potential increase in investor risk aversion as a result of external developments, on the other, imply a different monetary policy stance relative to the baseline projection. In addition, the Monetary Council perceives upside risks to growth linked to the pick-up in corporate lending and the stimulatory impact of the Funding for Growth Scheme.

Under the alternative scenario assuming a lower inflation environment, the ratio of unused domestic and external capacities available may be higher than assumed in the baseline projection, which in turn may imply more subdued domestic wage dynamics and a sharper decline in external inflationary pressure, and therefore the inflation target can be met with a persistently more accommodative monetary policy conditions. Under the alternative scenario assuming an unfavourable external environment and higher investor risk aversion, a sustained and marked shift in risk perceptions related to the economy points to the adoption of a tighter policy stance. A stronger pick-up in lending than assumed in the baseline projection may lead to an improvement in the long-term growth potential of the economy through a stimulus to productive investment, and therefore it does not imply a markedly different policy response from that assumed in the baseline projection.

Based on the above considerations, the Monetary Council has decided to reduce the base rate by 20 basis points


In the Council’s judgement, there remains a significant degree of unused capacity in the economy and inflationary pressures are likely to remain moderate over a sustained period. Global financial markets continue to be volatile. A sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy. The projection in the December Report implies that further policy easing is likely to be required in order to deliver price stability in the medium term. Considering perceptions of the risks associated with the economy as well as the improvement in the pace of economic growth, further easing of monetary policy may follow, but a reduction in the increment is likely to be warranted in the future.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 January 2014.

Magyar Nemzeti Bank

Monetary Council