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Press release by the Monetary Council on the review of the inflation target

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After a scheduled review of the Bank’s inflation target, the Monetary Council decided to improve the flexibility of the inflation targeting regime. As a result, the Council designated a ±1 percentage point tolerance band while maintaining the inflation target defined as a 3 per cent rate of increase in the domestic Consumer Price Index published by the Central Statistical Office. In line with past practice, the MNB will publish an assessment of performance in meeting the inflation target each year, in the Annual Report.


The primary statutory objective of the Magyar Nemzeti Bank is to achieve and maintain price stability. Since 2001, the framework for meeting the Bank’s statutory objective has been the inflation targeting regime. The MNB can contribute to sustainable economic growth by achieving and maintaining price stability. The conditions for price stability are assumed to hold if economic agents can reasonably expect inflation to remain low and stable looking ahead over a longer period. Price stability does not necessarily mean inflation around zero – persistently and excessively low inflation, or negative inflation, may have risks to economic activity as well. A 3±1 per cent target is low enough to ensure that economic losses arising from inflation remain moderate, takes into account potential statistical distortions stemming from the method of calculating the Consumer Price Index, and may adequately mitigate the risk of deflation. At the same time, it also takes into account the fact that growth in emerging economies is associated with the catch-up with developed countries in terms of prices, which may cause additional inflation relative to developed countries.


The financial crisis has posed new challenges to monetary policy all around the world. The crisis highlighted that the shocks to the economy may be much greater than previously thought and the probability of monetary policy being faced with constraints will not be negligible in the future. Under the inflation targeting regime, central banks have moved towards greater flexibility and reformed their monetary policy instruments. While maintaining the primary objective of price stability, flexible inflation targeting provides a framework where the central bank not only focuses on inflation in the short run, but it also takes into account other (real economic and financial stability) factors. Primarily, real economic factors are taken into account in decision-making in a way that the central bank is willing to tolerate deviations of consumer prices from the inflation target temporarily, in order to avoid excessive volatility of real variables.


A ±1 percentage point tolerance band around the inflation target may contribute to increasing the flexibility of the framework. The use of a tolerance band is consistent with international best practice followed by central banks. The Bank continues to aim at achieving 3 per cent inflation; however, the ±1 percentage point tolerance band recognises that inflation may fluctuate around that level as an effect of shocks hitting the economy. The time horizon relevant for the Monetary Council continues to be 6 to 8 quarters.


The Government’s economic policy may contribute to achieving and maintaining price stability through several channels. Keeping the government deficit at a stable and low level and further reducing debt, tax measures and changing administered prices in line with the 3±1 inflation target help reduce the real economic costs of achieving and maintaining price stability.


The Council will review the new inflation target after 3 years at the latest, or at the time of entry into the ERM 2 exchange rate regime by Hungary.


MAGYAR NEMZETI BANK
Monetary Council