At its meeting on 21 June 2004, the Monetary Council considered the latest economic and financial developments and left the central bank base rate unchanged at 11.50%.

Inflation uncertainty has increased in the period since publication of the June 2004 issue of the Quarterly Report on Inflation. The market’s perception of risks to Hungary’s domestic and external imbalances has also increased, as reflected in the recent rise in risk premia required on forint-denominated investments.

Consumer price inflation in May turned out to be slightly higher than the Bank expected. This pick-up in the rate of inflation cannot be related to a single product group – the rise in the consumer prices index was observable in each component of core inflation.

Several factors may have played a role in the pick-up in inflationary pressure. Private sector wage inflation in the first four months of 2004 proved somewhat higher than anticipated. However, the inflationary effect of this was reduced by the rapid gains in manufacturing productivity. In addition, oil prices turned out to be higher than assumed in the May Report. And higher oil prices may fuel inflation over the longer term by increasing production costs and feeding through to market expectations.

First-quarter GDP growth outperformed most expectations. According to 2004 Q1 data, the external demand-driven recovery in the corporate sector, associated with slowing consumption growth, is increasingly becoming the backbone of economic growth. This reduces the risk related to current account deficit financing and eases inflationary pressure.

The current account deficit increased significantly in April, explained mainly by the upsurge in goods imports. This rise in imports was ascribable in part to the pick-up in corporate investment and in part to one-off influences linked to Hungary’s accession to the EU. Market uncertainty related to both fiscal and external equilibrium developments has increased recently, as reflected in the rise in long-term government securities yields.

In the light of these, the Monetary Council decided to leave the central bank base rate unchanged, maintaining its view that the stance of monetary policy should remain cautious.