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Press release on the Monetary Council meeting of 22 July 2014


22 July 2014

At its meeting on 22 July 2014, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 20 basis points from 2.30% to 2.10%, with effect from 23 July 2014.

In the Council’s judgement, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, output remains below potential and is likely to approach that level in the course of next year. Despite the pick-up in domestic demand, capacity utilisation is expected to improve only gradually due to the protracted recovery in Hungary’s export markets. With employment rising, the unemployment rate is falling, but still exceeds its long-term level determined by structural factors. Inflationary pressures in the economy are likely to remain moderate for an extended period.

Based on the inflation data for June, consumer prices continue to show historically low dynamics. The Bank’s measures of underlying inflation capturing the medium-term outlook still indicate moderate inflationary pressures in the economy, reflecting low inflation in external markets, the degree of unused capacity in the economy, subdued wage dynamics, the fall in inflation expectations and the reductions in administered prices, implemented in a series of steps. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. However, domestic demand-side disinflationary pressures are weakening gradually as activity gathers pace, and inflation is likely to reach levels around 3 per cent consistent with price stability at the end of the forecast horizon.

Based on data available since the latest interest rate decision, economic growth continued, as reflected in data for industrial production and retail trade. In the Council’s judgement, the Hungarian economy returned to a growth path in 2013. Looking ahead, economic growth may continue in a more balanced pattern than previously, with the recovery in domestic demand likely to make a greater contribution. Investment is likely to continue accelerating, reflecting the increasing use of EU funding and the easing in credit constraints also due to the Bank’s Funding for Growth Scheme. Household consumption is also likely to grow gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging. However, propensity to save is expected to remain above levels seen prior to the crisis. Based on labour market data for May, the number of employees, excluding those employed under public employment programmes, remained broadly unchanged relative to the previous month, and the unemployment rate fell. The labour market is expected to become tighter.

International investor sentiment was volatile in the past month, mainly reflecting the escalation of geopolitical conflicts and weaker-than-expected European macroeconomic data. Hungarian risk premia remained broadly unchanged in the period and the forint exchange rate depreciated slightly, with country-specific factors playing a role, in addition to external factors. Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. The announcement of the Bank’s self-financing concept may contribute to an improvement in perceptions of the risks associated with the domestic economy. In the Council’s judgement, a cautious approach to policy is warranted due to uncertainty about future developments in the global financial environment.

 In the Council’s judgement, there remains a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate for an extended period. The negative output gap is expected to close gradually at the monetary policy horizon. In the Council’s judgement, it was justified to end the easing cycle because of the need to remove uncertainty about the bottom of the interest rate path, and the medium-term achievement of price stability made it necessary to implement a further 20 basis point reduction in interest rates. The Council judges that the central bank base rate has reached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the economy. That means that the two-year easing cycle of a significant cumulative reduction of 490 basis points has ended. Looking ahead, the macroeconomic outlook points in the direction of persistently loose monetary conditions.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 August 2014.

Magyar Nemzeti Bank
Monetary Council