24 October 2005
1. At its meeting on 24 October 2005, the Monetary Council considered the latest monetary and economic developments and left the central bank base rate unchanged at 6.0%.
In the Council’s assessment, a number of factors have facilitated the development of a low-inflation environment over the recent period. Consumer prices were 3.7% higher in September than a year earlier; and the rate of core inflation fell below 2%.
However, the Council expects a variety of factors to influence future inflation developments. Although the reduction in VAT rates will slow the annual rate of price inflation considerably in 2006, its direct effects are likely to wear off in 2007. Different shocks are expected to affect labour costs in the near future, which is likely to add to inflation uncertainty. Oil prices have remained high in recent weeks, coupled with the build-up of inflationary pressure in the world economy. Nevertheless, there appears to be a good chance that the inflation target will be met.
The uncertainty surrounding Hungarian economic balance and the country’s convergence process has increased significantly recently. The Council has received several pieces of news which suggest the development of adverse conditions.
The Government has revised upwards the deficit ratio for 2005 relevant for the adoption of the euro in Hungary. Although this upward revision itself is not expected to affect the country’s indebtedness, it may have a negative influence on the market’s assessment of Hungary’s convergence process. It has become obvious to market participants that over the coming years the budget deficits may turn out worse than earlier expectations. The deficit target for 2006, set in the budget bill, is higher than outlined in the convergence programme and, moreover, it involves a number of upward risks, as pointed out in the latest analysis by the European Commission. The Hungarian economy has moved farther from the nominal convergence path facilitating the adoption of the euro in 2010. The Council has stressed on previous occasions that the adoption of the euro should be given priority in the interests of long-term economic growth, which, in turn, requires a commitment to meet the Maastricht convergence criteria at the earliest possible date. Although the Government has repeatedly confirmed its commitment to adopting the euro in 2010, the announcement has not yet been coupled with specific measures.
As regards the external environment, there are signs that the current favourable assessment of emerging economies may deteriorate. In the Council’s view, continued inflationary pressures in the world market could influence major central banks’ interest policy over the near term. Rises in yields in developed markets may have a negative impact on demand for emerging-country assets, which, in turn, may lead to an increase in yields on forint-denominated assets.
The Minutes of the Council’s meeting will be published at 2 p.m. on 18 November 2005.
2. At its meeting, the Council also discussed the conceptual framework for the Quarterly Report on Inflation, to be issued on 28 November 2005.
MAGYAR NEMZETI BANK