18 July 2005

1.        At its meeting on 18 July 2005, the Monetary Council considered the latest economic and financial developments and decided to reduce the central bank base rate by 25 basis points, from 7.00% to 6.75% with effect from 19 July 2005.

Reflecting longer-term inflation trends, core inflation has decreased over the past period. It stood at 2.2% in Q2 and at 1.9% in June. Low core inflation is attributable, in a large part, to a fall in the prices of tradable goods. Decrease has also been discernible in the prices of non-durable goods in the past months. The inflation of market services remains moderate. Moderate expansion in consumption as well as wage and staffing level adjustment in the labour market contribute to a stable low inflationary environment, which in turn points to stable inflation expectations.

Rise in consumer prices has, however, exceeded core inflation significantly. It amounted to 3.8% in both Q2 and June. Increase in the consumer price index was mainly ascribable to goods exogenous to core inflation. Over the past months shorter-term inflation outlook has been affected not insignificantly by factors that monetary policy cannot influence, e.g. by an increasingly persistent rise in oil and unprocessed food prices, in particular.

In the Monetary Council’s judgement, risks to long-run equilibrium in the Hungarian economy remain considerable. A pre-condition for reduction in such risks is a fiscal policy that guarantees that the envisaged tax cuts entailing significant loss in revenues are fully in keeping with the expenditure side and that fiscal consolidation, to which commitment was made in the Convergence Programme, is implemented.

In the international financial markets, especially in the CEE region, willingness to take risks remains marked, which currently offsets the impact of domestic fundamentals on risk perception. As a combined effect of these factors, domestic exchange rate developments have been relatively stable over the past period, with yields falling.

The Monetary Council wishes to reiterate that monetary policy will continue to respond only to persistent trends, i.e. ones that influence inflation over the medium term. Accordingly, it does not intend to offset transient one-off impacts arising from tax policy measures by monetary policy ones.

2.        The abridged minutes of the meeting are scheduled to be published at 14:00 hrs on 12 August 2005.

                                                                                    Magyar Nemzeti Bank

                                                                                        Monetary Council