15 December 2003
The Government's measures, announced last week, are expected to reduce economic imbalances. In the Council's view, it is favourable from the perspective of medium-term economic growth that the inequilibrium will be managed by reducing the government deficit and growth in household indebtedness. The expected fall in the current account deficit will likely reduce the vulnerability of the forint exchange rate.
The measures, while dampening growth in domestic demand which has recently been rising at an unsustainable rate, are expected to contribute to the reduction in risks to inflation in 2004 and 2005. Inflation in November was only 0.5 percentage points higher than expectations. The major part of the increase in inflation was related to product groups exogenous to monetary policy (for example, regulated prices and food prices). Nevertheless, in addition to the risk carried by the planned increase in indirect taxes, the November data increased further the risks that inflation would stick in at higher levels next year. The current circumstances, therefore, require cautious interest rate policy.