At its meeting on 19 July 2004, the Monetary Council considered the latest economic and financial developments and left the central bank base rate unchanged at 11.50%.

Macroeconomic data which have become available recently have not changed significantly the Monetary Council’s view of the inflation path and economic balance.

In the Council’s assessment, it is favourable that, although slightly, both core inflation and headline inflation have declined. Taking the second quarter as a whole, core inflation practically met the Bank’s expectations, while the outturn for the consumer price index was slightly above expectations, due to the strong increase in unprocessed food prices.

The Council identifies the risk that the slowdown in the rate of wage growth turns out to be less significant than anticipated. Although private sector wages grew at a more modest rate in May than in the earlier months of the year, the change in the yearly pattern of take-home pay introduces uncertainty into the assessment of the near-term outlook for wage inflation.

Data released in recent months have reinforced the view that the structure of economic growth is changing positively: whole-economy exports and fixed investment activity have increasingly become the engine of growth, replacing domestic consumption. Simultaneously with the gradual pick-up in global business activity, Hungarian industrial output has risen at a brisk pace, in which the fast growth of exports has played a dominant role. In addition, household sector net financial savings have also increased.

The May goods data have reinforced the Council’s earlier assessment that the considerable upturn in imports in March–April may have partly been attributable to transitory factors. As robust demand for imports may also be linked to higher fixed investment activity, at this juncture it is difficult to judge the rate and extent of the moderation in external imbalance anticipated for 2004.

Data available on this year’s government deficit have failed to reduce uncertainty whether this year’s deficit target may be met unless further government measures are taken. This, in addition to the risks to external equilibrium, continues to keep required premia on forint-denominated investments at a relatively high level.

Based on the factors discussed above, the Monetary Council, consistent with the assessment formulated at its previous rate-setting meeting, maintains its view that the stance of monetary policy should remain cautious in order to meet the 4% inflation target for end-2005. Accordingly, the Council has left the central bank base rate unchanged.