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16 December 2014

At its meeting on 16 December 2014, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 2.10%.


In the Monetary Council’s judgement, persistently loose monetary conditions are consistent with the achievement of price stability.

In the Council’s judgement, with the easing cycle completed, maintaining loose monetary conditions for an extended period is warranted by the medium-term achievement of the Bank’s inflation target and a corresponding degree of support to the real economy. In addition to the primary goal 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.

Global economic growth continues at a moderate pace. The low inflation environment is likely to persist for a sustained period.

Significant differences remain across the individual regions in terms of economic growth. The recovery in the euro-area economy has been slow and fragile, while strong growth in the US is likely to continue looking ahead. Growth has been slowing in the larger emerging market economies. Global inflation remains moderate, in line with the decline in commodity prices, particularly the sharp drop in crude oil prices and weak demand, and inflationary pressure in the global economy is likely to remain moderate for a sustained period looking ahead. There have been differences in the monetary policy stance of globally influential central banks in recent months; however, monetary conditions remain loose overall and, consequently, global interest rate and liquidity conditions continue to be supportive.

Inflation in Hungary is likely to be significantly below the inflation target next year, and rise to levels around 3 per cent only in the second half of the forecast period.

The Council expects inflation to be significantly below the inflation target next year, and rise to levels around 3 per cent in the second half of the forecast period. In recent months, inflation has been lower than the projection in the September issue of the Inflation Report, mainly on account of the sharp decline in commodity prices, the low food prices and weak demand. In the first half of the forecast period, domestic inflation is likely to be substantially below the target, mainly reflecting cost shocks having downside effects on inflation as well as the weak demand and inflation environment in Hungary’s major trading partner countries. In the second half of the forecast period, inflation is likely to move in line with the inflation target, reflecting the recovery in activity and the increase in wage dynamics, as the effects of cost shocks fade away. Inflation expectations anchored around the target are likely to ensure that price and wage-setting will be consistent with the inflation target.

In the Council’s judgement, domestic economic growth may continue in a balanced pattern.

The recovery in the real economy has continued over the past quarter, with output rising across most sectors on an annual basis. At the forecast horizon, domestic demand is expected to make the largest contribution to growth. Subdued global activity and the slowdown in the euro area economy are likely to act as a drag on export growth in 2015; however, the contribution of net exports to growth is likely to increase in the second half of the forecast period. The extended and prolonged Funding for Growth Scheme is likely to promote corporate investment next year, but weak global economic activity abroad and lower receipts of EU funding are likely to work in the opposite direction. Households’ investment activity is expected to rise gradually from its historically low level. As seen in previous quarters, the gradual improvement in employment and rising household real income due to low inflation are likely to play a key role in the recovery in household consumption. The uniformity decision of the Curia concerning household loans will effectively contribute to the reduction of existing debts thus household net financial wealth is expected to increase, accelerating the deleveraging process.  The conversion of foreign currency loans into forint is expected to reduce uncertainty surrounding households’ future income and wealth position, thereby strengthening consumer confidence and supporting the recovery in consumption and domestic demand.

Hungary’s financing capacity remains high and external debt is falling.

The external position of the economy amounted to nearly 8 per cent of GDP in the second quarter of 2014. Over the coming year, the trade surplus is expected to rise despite the increase of imports driven by the pick-up in consumption and investment, reflecting the improvement in the terms of trade and, from 2016, the recovery in external demand. The surplus on the transfer account is likely to fall from its historical high as the budget cycle of European Union funding ends. As a result of the two offsetting effects, Hungary’s current account surplus and external financing capacity are likely to stabilise at a high level in the coming years. Consistent with this, the country’s external debt ratios, key in terms of the country’s vulnerability, are likely to continue to decline. The Bank’s self-financing programme, the conversion of foreign currency loans into forint and the provision of foreign currency funding by the Bank related to conversions will contribute positively to the change in gross debt.

The Hungarian risk premium has fallen in the past quarter and sentiment has been generally favourable in global financial markets.

International investor sentiment has been generally favourable in the past quarter. Global risk appetite fell in the middle of October, but sentiment in financial markets began to improve from the end of the month. The positive turnaround in sentiment reflected the release of favourable macroeconomic data in the US, the launch of the ECB’s asset purchase programme, monetary easing by the Bank of Japan, the reduction in interest rates in China and the continued decline in crude oil prices. Of the domestic risk indicators, the CDS spread has been broadly unchanged over the past quarter and foreign currency bond spreads have fallen. Long-term yields on forint-denominated bonds have declined significantly in the period since publication of the September Inflation Report. The forint has appreciated against the euro in the past quarter, due mainly to country-specific factors. Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s judgement, a cautious approach to monetary policy is warranted due to uncertainty in the global financial environment.

The macroeconomic outlook is surrounded by both upside and downside risks. Downside risks to inflation increased.

Overall, downside risks to inflation increased relative to the September Report projection. The Monetary Council considered three alternative scenarios around the baseline projection in the December Report, which, if materialise, might influence significantly the future conduct of monetary policy. In the alternative scenario assuming persistently lower oil prices, the decline in the price of oil is mainly driven by supply-side factors. The lower inflation environment points in the direction of looser monetary conditions than assumed in the baseline scenario and economic growth may be stronger. The alternative scenario assuming persistently weak external demand implies downside risks to growth and inflation, and therefore looser monetary conditions ensure the achievement of the inflation target. The intensification of geopolitical tensions, associated with a decline in external demand, could lead to a sudden, sharp rise in the risk premium. As a result, exchange rate depreciation might raise inflationary pressure, and therefore a tighter monetary policy stance might ensure that the inflation target is met at the forecast horizon.

In the Council’s judgement, there is a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate in the medium term. The negative output gap is expected to close gradually at the monetary policy horizon. Looking ahead, therefore, the disinflationary impact of the real economy is likely to diminish. With current monetary conditions maintained, inflation is likely to move into line with the target in the second half of the forecast period, despite disinflationary trends in external markets. The Council judges that, based on available information, the current level of the central bank base rate is consistent with the medium-term achievement of price stability and a corresponding degree of support to the real economy. If the assumptions underlying the Bank’s projections hold, achieving the medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 23 December 2014.

Monetary Council