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Statement on the Monetary Council's decision of 18 November

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18 November 2002

With effect from 19 November, the Monetary Council of Magyar Nemzeti Bank has today reduced the central bank base rate by 50 basis points, from 9.50% to 9.00%.

The reduction in the Bank's main policy rate has been allowed by the recent appreciation of the forint. In the Monetary Council's assessment, the inflation targets set for end-2003 and end-2004 can be achieved with an exchange rate fluctuating around HUF 238–242, provided that the announced fiscal tightening is implemented and a disciplined path for wage growth is established. A stronger exchange rate relative to that forecast by the Bank earlier may help to achieve the Bank's inflation target through its direct effect on import prices and its indirect dampening effect on aggregate demand.

A key factor behind recent strong capital inflows has been the anticipated drop in the risk premium associated with Hungary’s forthcoming accession to the European Union and the ERM II exchange rate mechanism. In the Council’s view, the current exchange rate regime, pegging the exchange rate of the forint to the euro at a central parity of HUF 276.1 within a +-15% fluctuation band, meets the requirements of ERM II without any alteration.