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Statement by the Monetary Council (22 September, 2003)

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Magyar Nemzeti Bank maintains base rate at 9.50%

1 At its meeting on 22 September, the Monetary Council considered the latest economic and financial developments and left the central bank base rate unchanged at 9.50%.

2 The forint exchange rate has recently been fluctuating within the EUR/HUF 250–260 range, viewed by the Bank as important for policy purposes in its earlier communications. However, counterbalancing the negative risks to inflation in 2004 requires further appreciation of the exchange rate. Government securities yields suggest that the market anticipates a rapid decline in the Bank's major policy rate. Expectations of an interest rate reduction are an obstacle to the further strengthening of the exchange rate. The Council will continue to insist on maintaining the current level of the major policy rate until the exchange rate stabilises within the stronger half of the EUR/HUF 250–260 range.

3 In the Bank's view, in order that the market's inflation outlook can be influenced, the one-off inflationary effect of the 2004 VAT increase should be transitory and should not lead to heightened inflation expectations. This requires, in addition to a satisfactorily strong forint exchange rate, reaching an agreement by the National Interest Reconciliation Council on nominal gross wage increase that reflects the Bank's expectation that inflation should fall below 5.5% by December 2004, following a temporary increase.