1.    Having reviewed the economic and financial developments, at its 25 April 2005 meeting the Monetary Council lowered the central bank base rate by 25 basis points from 7.75 per cent to 7.50 per cent with effect from 26 April, 2005.

Based on the macroeconomic data revealed in the past thirty days, in the Monetary Council’s opinion the inflation outlook remains favourable. Despite fluctuations in the CPI data and increased risk in the items beyond the control of monetary policy, improvements in core inflation developments substantiate the persistence of a low-rate environment. However, risks to equilibrium in the economy and the risks ensuing from sudden changes in the favourable global investment environment remain imminent. In the Council’s view, the current favourable developments in inflation allow a cut in the base rate, however, with a view to the risks, increased precaution must be taken in monetary policy.

Core inflation continued to slow in March, which suggests persistence in the disinflation seen in the past few months. Slowdown is due to facts like a stable exchange rate, sharp market competition and slowing household consumption. Favourable trend inflation developments suggest that the secondary effects of the stable exchange rate, revealed through inflationary expectations, are beginning to unfold. This is also shown in a slowdown in wage inflation and the inflation of market services in 2005 Q1. Due, however, to the accelerating rise in the prices of items beyond the control of monetary policy – primarily motor fuel and unprocessed food prices –, the overall CPI has also accelerated and the risks towards higher inflation increased. Despite this fact, the Council is of the opinion that the conditions of maintaining a low-inflation environment in the long term have improved.

The precondition to maintaining an environment of low inflation and stable economic factors in the long term is the management of the equilibrium problems. In 2004, the external borrowing requirement of the economy amounted to 8.5 per cent of GDP. Although in comparison to the 2003 low, the rate of non-debt financing has increased, the pace of external indebtedness cannot be maintained in the long term. As adaptability in the private sector is limited, fiscal policy has a key role in the improvement of the external equilibrium position, as it can permanently reduce the borrowing requirement of the general government.

Due to the fast increase in the external indebtedness, changes in the global investment priorities have a fundamental significance in the domestic money market developments. Following the mid-March 2005 decline in the global risk appetite, uncertainties pertaining to future prospects have augmented. Although the international investment environment can still be considered as favourable, the likelihood of further deterioration has increased and this is a potential risk to the Hungarian economy.

2.    A short version of the minutes of the meeting will be published at 14:00 hours on 6 May, 2005.

3.    The Monetary Council discussed the MNB publication Report on Financial Stability. The Council will publish a separate statement in connection with the publication of the Report.

Budapest, 25 April, 2005

                                                                                    Magyar Nemzeti Bank

                                                                                        Monetary Council