24 October 2006

1.    At its meeting on 24 October 2006, the Monetary Council considered the latest economic and financial developments and voted to increase the central bank base rate by 25 basis points from 7.75% to 8.00%, with effect from 25 October 2006.

In the Council’s view, there are a number of uncertainties surrounding the assessment of recent inflation developments. The latest macroeconomic data confirmed the picture of rising inflationary pressures since early summer 2006. Although one-off factors, such as the increases in administered prices and VAT rates, may have played a role in the rise in price levels in September, the underlying trend of inflation is likely to be upwards over the period ahead. Unfavourably, the fast pick-up in inflation in recent months has affected a broad range of products, which may be seen as a sign of increased inflation expectations. Private sector wage data for recent months are also a warning signal. However, interpretation of earnings figures is made more difficult by the combined impact of increased tax burdens and changes in the regulatory environment. Bonus payments in August, unusually high by the standards of the previous years, also appear to reflect these effects. Nevertheless, the rate of wage inflation is likely to have accelerated recently, even taking into account the temporary influences.

The fall in crude oil prices and the strengthening of the exchange rate in recent weeks are good news for inflation prospects. To the extent that these developments persist, they will have a positive influence on the outlook for future inflation.

Financial markets have stabilised somewhat in recent weeks, as reflected in foreign investors’ large-scale purchases of forints. In the Council’s view, the main reasons for this seem to have been the improvement in the international environment for investments and the MNB’s interest rate increases over the recent period, in addition to foreign investors’ belief that the implementation risk of the Government’s stabilisation package has diminished.

In the Council’s assessment, the risk of a sustained rise in economic agents’ inflation expectations remains high. The Council has therefore judged it necessary to tighten monetary policy. In order to maintain price stability, it is crucially important that one-off measures boosting the general price level should not be built into economic agents’ inflation expectations, and particularly into nominal wage growth, and so they should not generate sustained inflationary pressure in the economy.

2.    The minutes of today’s Council meeting will be published at 2 p.m. on 14 November 2006.


Monetary Council