18 December 2006

1.   At its meeting on 18 December 2006, the Monetary Council considered the latest economic and financial developments and voted to leave the central bank base rate unchanged at 8.00%.

2.   Prices have increased sharply across a broad range of products over recent months. According to the latest data, the rate of consumer price inflation slowed in November, though it still remained high.

Inflation is likely to pick up again strongly in the beginning of 2007, partly due to the base effect associated with the VAT cut in early 2006 and partly to further increases in administered prices; and it is expected to fall materially only in the second half of 2007. Further out, the risk of feed-through from one-off price rises remains, because of the persistently high rates of price increases.

There has been robust growth in industrial output and net exports recently, benefiting from the recovery in the world economy. By contrast, domestic absorption has changed little over the past two months. Despite the benign international context, the rate of Hungarian economic growth is likely to slow significantly next year, due to the moderation in domestic demand, which, in turn, may contribute to offsetting inflationary pressures.

Investors’ mood has improved around the world, which has also been reflected in the fall in forint yields and the appreciation of the exchange rate. The credibility of the Government’s intentions to consolidate the fiscal position has increased, influencing money and capital market developments over the recent past.

In the Monetary Council’s judgement, the risks to future inflation are significant and likely to remain in the period ahead. In view of the uncertainties, the Council will continue to monitor inflation developments carefully and will aim to prevent potential second-round effects from taking hold.

3.   The minutes of today’s Council meeting will be published at 2 p.m. on 12 January 2007.

Monetary Council