19 September 2005

1.    At its meeting on 19 September 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 6.25% to 6.00%, with effect from 20 September 2005.

Consumer price inflation has been fluctuating between 3%–4% this year. Core inflation, better reflecting underlying inflation developments and the longer-term outlook for inflation, has stabilised below 2% in recent months. A higher rate of increase in consumer prices relative to core inflation has mainly been accounted for by rises in the prices of oil and unprocessed foods. In the Council’s evaluation, this year’s low outturns for the core measure of inflation have also been explained by one-off factors such as intensifying import competition due to Hungary’s EU accession and the transformation process underway in retail trade. These shocks are unlikely to lead to a lasting reduction in inflation; however, higher demand and the rise in the minimum wage in 2006 are expected to increase inflationary pressure.

The longer-term macroeconomic outlook continues to be surrounded by uncertainty. Although the current account deficit has fallen slightly relative to the previous year, the Council does not consider the build-up in the country’s external indebtedness to be sustainable. A precondition for reducing risks to economic balance is a fiscal stance which ensures that the general government borrowing requirement falls in 2006, after taking account of the expected tax revenue shortfalls already officially announced. This factor alone implies a significant degree of fiscal adjustment which rules out any further tax cuts over the short term.

The international investment climate has been benign: demand for higher-risk financial assets continues to be robust. This has been a contributing factor to the Council gradually reducing the central bank base rate, in line with the improving prospects for inflation. However, a potential fall in global investor appetite for risk may bring the fundamental risks facing the Hungarian economy to the fore.

The minutes of this Council meeting will be published at 2 p.m. on 14 October 2005.

2.    At its meeting, the Council also discussed the first draft of the Report on Financial Stability, to be issued on 10 October 2005.


Monetary Council