At its meeting on 18 October 2004, the Monetary Council considered the latest economic and financial developments and decided to reduce the central bank base rate by 50 basis points, from 11.00% to 10.50%, with effect from 19 October 2004.

Based on macroeconomic data published in the past one month, the Council judges that, on balance, the processes key to inflation developments have turned out to be positive. Since it peaked out in May, the path of inflation has definitely been downwards. The Council expects this trend to continue in the near term.

The sustained strength of the exchange rate has proved to be favourable for the disinflation outlook, as it has played an important role in the decline in inflation through import prices. At this juncture, lowering the official interest rate level in a cautious manner is not judged to expose the disinflation process to risks.

The latest data have failed to provide a clear clue to the current phase of the business cycle. Output growth slowed in August, according to the latest figures. By contrast, data on goods trade are evidence of lively export growth, which, in turn, suggests a strong upturn in corporate performance.

The current level of the current account deficit is a major sustainability risk factor, especially, if it leads to a build-up in the country’s external debt. Hungary’s external equilibrium position may be influenced significantly by the 2005 general government effect. In the Monetary Council’s view, although the budget bill, submitted to Parliament, aims at a substantial reduction in deficit, it departs considerably from the path laid down in the Convergence Programme and meeting the deficit target is laden with risks. Due to the implementation of part of infrastructure developments as Public-Private Partnership programmes, estimating the extent to which general government may contribute to the reduction in domestic demand and, through this, to the improvement in external balance, is still surrounded by uncertainty.

Earlier market uncertainties have eased, which has also been reflected in the fall in long-term yields. This, coupled with recent favourable inflation developments, makes it possible for the Monetary Council to lower its key policy rate without putting the inflation target at risk. In the near future, the Council’s will continue to maintain its cautious interest rate policy stance.