24 July 2006

1.    At its meeting on 24 July 2006, the Monetary Council considered the latest economic and financial developments and voted to increase the central bank base rate by 50 basis points, from 6.25% to 6.75%, with effect from 25 July 2006.

In the Council’s judgement, meeting the 3% medium-term inflation target, set jointly with the Government, requires a tighter policy stance than currently. The Council’s objective is therefore to create firmer monetary conditions, by raising the Bank’s key policy rate in a series of steps.

Trend inflation, better capturing the less volatile components of inflation developments, and virtually all the important components of core inflation have risen in recent months. This points to a sustained rise in inflation.

The Council expects inflation to rise significantly throughout 2007. Inflation may turn out to be above the 3% target in 2008, the year relevant for monetary policy, if monetary conditions are to remain unchanged. In addition to trend inflation developments, several measures contained in the Government’s budgetary adjustment programme are likely to provide a one-off boost to prices; and the forint exchange rate, which has now been weaker for a longer period, also poses upside risks to inflation over the period ahead. By tightening its monetary policy stance, the Council intends to prevent the upward effects on domestic prices of the Government’s crucially important measures to restore external and domestic equilibrium from feeding through to economic agents’ expectations, and thus from causing sustained inflationary pressures.

The Monetary Council’s decision to raise the central bank base rate also took into account the fact that, in recent months, the environment for investments had turned less favourable worldwide and in the region, and also that investors believed that the risks associated with investments into Central and Eastern Europe had increased, irrespective of Hungarian economic fundamentals.

2.    The minutes of this Council meeting will be published at 2 p.m. on 11 August 2006.


Monetary Council