1. The Monetary Council has discussed the first version of the Quarterly Report on Inflation to be published on 18 August.

2. On 16 July 2003, the Government announced its intention of adopting the euro in Hungary on 1 January 2008. The Monetary Council welcomes the Government’s commitment to entering the euro area. In its Statement published on 21 July, the Council also pointed out the strict requirements the country would have to fulfil prior to joining the euro. In particular, reduction by 2006 in the general government deficit and inflation to permanently low levels set by the Maastricht criteria will demand serious efforts from domestic economic policy.

3. The path the Hungarian economy has to follow over the next few years in order to meet the Maastricht criteria is to be set by the Government by means of a medium-term economic policy programme entitled ‘Hungary’s Medium-term Economic Policy Programme Laying the Groundwork for Entering the Union’, to be submitted to the European Commission. The programme’s key task is to give a detailed presentation of proposed Government measures aimed at cutting the government deficit and controlling the public debt. To this end, the economic trends expected over the medium term need to be outlined in a credible and consistent manner, in addition to the economic policy strategy to be taken, should the economy diverge from the envisaged path. The Monetary Council lays great emphasis on a candid evaluation of the situation, as the credibility of the medium-term programme rests on the true presentation of the government deficit expected for this year and related risks.

4. The Government’s decision on Hungary’s adoption of euro in 2008 has given a new mandate to the Magyar Nemzeti Bank. Between March 2006 and March 2007 it will have to meet the Maastricht criteria for inflation, which means that inflation in Hungary in the above reference period will only be allowed to exceed average inflation in the three EU member states with the lowest level of inflation by a maximum of 1.5%. In order that such criteria can be met, inflation in 2006 will have to fall to a level not exceeding 3%.

However, due to the envisaged changes in tax legislation as well as increase in regulated prices, inflation in 2004 is likely to be higher than this year. Both the interest and exchange rate policy of the MNB is aimed at preventing one-off rises in inflation from heightening inflation expectations, raising economic agents’ awareness of their having to adjust themselves to an environment of permanently low inflation and facilitating an on-going moderation of wage growth in 2004 as well. Only if such conditions are complied with will the level of inflation needed for the adoption of the euro be reached in 2005.

In order for disinflation to continue and inflation targets to be delivered within the time frame set, a concerted monetary and fiscal policy must be pursued. Fiscal adjustment indispensable for the meeting of the Maastricht criteria for the budget will put a brake on domestic demand, thereby boosting disinflation. In order that the criteria for inflation will be met, a fiscal policy contracting demand, a stringent monetary policy and a forint exchange rate permanently stronger than the current market rate are needed.

5. Based on the above, at its meeting on 4 August 2003, the Monetary Council, having reviewed the recent economic and monetary developments, decided to leave the current central bank base rate of 9.5% unchanged.