29 March 2005

1.    At its meeting on 29 March 2005, the Monetary Council considered the latest economic and financial developments and decided to reduce the central bank base rate by 50 basis points, from 8.25% to 7.75%, with effect from 30 March 2005.

The exchange rate has stabilised, competition in several segments of the market has intensified, wage inflation has slowed down on the costs side and the rate of consumption growth has moderated on the demand side. In the Council’s assessment, these developments have all been supportive factors for the disinflation path consistent with the announced inflation objectives and, consequently, they have provided an opportunity to ease monetary conditions.

In recent months, there has been a significant decline in prices covered by the core measure of inflation; and disinflation has been underway in market services since February. These developments may influence considerably the future outlook for inflation.

January wage data for the private sector are consistent with the moderation in wage growth which has started in 2004 H2. But despite this slowdown, wage inflation is still seen as excessively high, although the upside risks to inflation from the labour market have fallen. The more benign outlook for prospective inflation relative to earlier periods has been conducive to a slowdown in the growth rate of nominal wages.

In assessing the future outlook for inflation, the risks posed by short-term oil price moves must also be taken into account, in addition to the fundamentally positive domestic environment. Similarly to the euro area, the inflationary impact of rising oil prices on the Hungarian economy has in recent months been mitigated by the depreciation of the US dollar. However, the upward risk to inflation arising from erratic oil price developments may increase this year.

The latest information related to economic growth is broadly in line with the Council’s assessment of economic performance in February, which contained a slight slowdown in the rate of growth in 2005–2006. In addition to domestic and international confidence indices, the January industrial output data suggest a slowdown in economic activity. January retail trade data are also consistent with the slowdown in consumption expected in 2005. Data on exports and imports have not shown signs of a departure from last year’s robust trends. This is seen as a positive development in terms of growth.

GDP growth in 2004 Q4 met earlier expectations; however, the pattern of this growth showed a greater-than-expected slowdown in domestic demand. The combination of a change in the structure of income growth and an anticipated slowdown in growth may add to disinflationary effects.

Global financial developments have in recent weeks had a stronger-than-earlier effect on the Hungarian money and capital markets. In the very favourable international investment climate, capital flows into emerging markets were extremely intense up to mid-March, which was reflected in the appreciation of the related currencies, the decline in yields and the significant rise in share prices. However, probably because of higher long-term dollar yields, the direction of global capital flows changed. As an effect of this, the Hungarian money and capital markets experienced a correction. The recent global capital market developments suggest higher future risks arising from volatile capital movements, which may affect the room for monetary policy to manoeuvre.

In taking its decision, the Monetary Council also took account of the fact that, despite the improvement in inflation outturns in recent weeks, the long-term risk assessment of the Hungarian economy had not improved materially, as reflected in the continued high interest rate differentials implied by long-term yields. Due to the persistence of risks to economic balance, the Council considers it extremely important that the recent reform of the Stability and Growth Pact, and the change to the accounting treatment of payments into private pension fund schemes in particular, do not lead to more relaxed fiscal policy relative to that in the Convergence Programme.

2.    The minutes of the Council meeting will be published at 2 p.m. on 15 April 2005.


Monetary Council