19 December 2005

At its meeting on 19 December 2005, the Monetary Council considered the latest economic and monetary developments and left the central bank base rate unchanged at 6.00%.

The Council’s overall assessment of domestic economic performance has little changed since its previous rate-setting meeting. Based on the most recent economic data, members continue to expect low inflation and favourable business conditions over the medium term. The recommendations for a moderate pay increase in 2006, agreed at the trilateral wage negotiations, are consistent with the benign inflation outlook.

Despite the slight rise in November, consumer price inflation and core inflation both continue to be low. It is difficult to measure the extent to which the reduction in VAT rates in 2006 will reduce the consumer price index, if only in the short term; however, the Council expects core inflation and the consumer price index to be close to the 3% medium-term target in 2007.

Uncertainty surrounding Hungary’s economic balance and convergence has not fallen in recent weeks. The Council has on occasions called attention to the risks stemming from fiscal performance; such risks were also reflected in the downgrading of Hungary’s domestic and foreign currency debt by Fitch Ratings in early December. Asset prices continue to reflect uncertainty about the convergence process: forint yields contain a high risk premium.

However, unfavourable domestic news affecting the financial markets has been partly offset by the very favourable international investment climate. Despite the interest rate increases by leading central banks in recent weeks, long-term euro and dollar yields continue to be low, with global demand for high-risk emerging-country assets remaining strong.

On balance, current monetary conditions are judged to be consistent with inflation remaining on track to be around the target. Over the period ahead, the Council will continue to pay special attention to risks to economic balance, and will take the necessary actions if such risks threaten to push inflation away from the inflation target.

The minutes of today’s meeting will be published at 2 pm on 13 January 2006.


Monetary Council