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Statement on the Monetary Council meeting held on 24 February 2003

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1 At its meeting on 24 February 2003, the Monetary Council left the central bank base rate unchanged at 6.50%.

2 Effective from 25 February 2003, the MNB has restored the unrestricted access to the two-week deposit facility, and it will only accept two-week deposits within the framework of its intermittent availability, without imposing quantity limits, as stipulated in the ‘Terms and Conditions of the MNB's Operations in the Forint and foreign Exchange Markets’.

3 With effect from 25 February 2003, the Council has set the width of the interest rate corridor at ±1 percentage point. Accordingly, the upper and lower boundaries of the interest rate corridor will be as follows:

• The interest rate on the liquidity-providing standing facility (overnight collateralised loan) will equal the central bank base rate plus 1 percentage point,

• The interest rate on the liquidity-absorbing standing facility (overnight deposit) will equal the central bank base rate minus 1 percentage point.

4 In the Monetary Council’s view, with the short period following the speculative attack in January over, the restoration of central bank policy instruments is fully justified. The measures which entailed a temporarily modified application of central bank policy instruments have proved to be successful. Two-thirds of the speculative capital that flowed into the country have been withdrawn as a result of the Bank’s intervention, changes in the on-balance sheet open position of the banking system as well as the FX transactions made by companies involved in foreign trade. The measures taken by the Bank did not lead to even temporary disturbances in the financial intermediary system. Nor did they threaten its stability. However, a protracted application of such temporary measures would greatly hinder the conduct of monetary policy.

The speculative attack in January drew attention to contradictions between the inflation targets and the environment created by fiscal and wages policies and the limitations of the exchange rate band. This conflict seems to be resolved as indicated in the statement to the February Report on Inflation which says that, under the prevailing conditions, the MNB accommodates an inflation outcome of 5.2% at end-2003 and 4.0% at end-2004. At the same time, in accordance with the provisions of the MNB Act, the Monetary Council continues to regard delivering and maintaining a low rate of inflation as its primary task and, within the existing constraints, seeks to achieve this objective using the full set of central bank instruments. In the Monetary Council’s judgement, the current level of the exchange rate is adequate for meeting the inflation projection published in the February Report on Inflation.