At its meeting on 25 August 2015, the Monetary Council reviewed the latest economic and financial developments and voted to maintain the central bank base rate 1.35%.
In the Council’s assessment, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, output remains below potential and the domestic real economic environment is expected to continue to have a disinflationary impact, albeit to a diminishing extent. 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, unemployment continues to exceed its long-term level determined by structural factors. Inflationary pressures are likely to remain moderate.
Consumer prices continued to show low dynamics in July, rising slightly compared with the same period a year earlier. The incoming inflation data was consistent with the projection in the June Inflation Report. Annual core inflation was unchanged relative to previous months. The Bank’s measures of underlying inflation continue to indicate moderate inflationary pressures in the economy, reflecting subdued imported inflation, falling commodity prices and the degree of unused capacity in the economy. Core inflation is likely to rise gradually as domestic demand picks up; however, the continuing decline in commodity prices may moderate the increase in the consumer price index. Domestic real economic and labour market factors continue to have a disinflationary impact. Consequently, inflation is expected to approach levels around the 3 per cent target only towards the end of the forecast horizon, reflecting moderate underlying inflation.
According to the preliminary estimate, domestic economic growth continued in the second quarter. Growth was slightly slower than projected in the June Inflation Report, presumably as a result of the weaker agricultural output. The Council assesses that, based on the monthly macroeconomic indicators, underlying growth has not changed significantly and economic growth is likely to continue at a rapid pace. In June, industrial production rose relative to the previous month and the same period a year earlier. The dynamics of retail sales have been stable in recent months, with the volume of sales increasing across a wide range of products. Rising household real income underpinned by low inflation, the reduced need for deleveraging and growing employment are expected to contribute to the increase in household consumption. Investment is expected to pick up gradually, owing to the recovery in activity, as well as the Funding for Growth Scheme and its extension. Employment continued to grow, with the unemployment rate falling below 7 per cent in the second quarter.
Sentiment in global financial markets has been volatile in the period since the Council’s latest policy decision, but this has had little impact on domestic financial market indicators. Developments at the negotiations on the settlement of Greek government debt led to an improvement in sentiment. By contrast, global risk appetite deteriorated, reflecting uncertainty about Chinese capital market developments and the country’s growth outlook as well as an impending interest rate increase by the US Fed. Domestic financial markets have been calm, with the forint fluctuating against the euro within a narrow range. The domestic CDS spread and long-term government bond yields have been broadly unchanged since the previous policy decision. The persistently high external financing capacity of the Hungarian economy and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s assessment, a cautious approach to monetary policy is warranted due to uncertainty in the global financial environment.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate. The negative output gap is expected to close only gradually over the policy horizon. If the assumptions underlying the Bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 September 2015.