17 December 2007

At its meeting on 17 December 2007, the Monetary Council reviewed the latest economic and financial developments and voted to maintain the central bank base rate at 7.50%.

Economic data released since the November meeting have not materially changed the Council’s view of economic prospects. The Government’s fiscal consolidation measures as well as the cost shocks of the recent past are likely to lead to significantly higher inflation and economic growth below potential in 2007–2008. The Council expects inflationary pressures to diminish in response to the slowdown in economic growth, and consequently, inflation may fall back to close to the 3% target by 2009, after the primary effects of the cost shocks unwind. However, a potential increase in inflation expectations continues to represent an upside risk.

Based on the detailed GDP figures for Q3, the slowdown in the real economy is likely to have reached its low point; however, at present there seems to be little probability of a rapid recovery. And despite strong export growth, the components of domestic demand show few signs of picking up.

Consumer price inflation rose in November. That partly reflected the recent rapid rises in food and energy prices. For inflation to ease back to the level compatible with price stability, it is crucial that higher food and energy prices do not lead to a sustained increase in expectations. Price and wage decisions, consistent with weak demand growth, would contribute to faster economic growth.

There continues to be considerable uncertainty in international financial markets caused by the problems in the US mortgage market. In the circumstances, demand for emerging market financial assets, and forint-denominated assets in particular, is driven mainly by investors’ willingness to take risks rather than by countries’ economic fundamentals. High volatility and general uncertainty are expected to remain in international money and capital markets over the next few months.

The Monetary Council left interest rates unchanged after taking account of the risks surrounding inflation expectations and international capital markets. The Council will have scope for reducing interest rates further if domestic economic conditions suggest a reduction in the risk of higher inflation transmitted through expectations and an improvement in international investor sentiment towards the Hungarian economy.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 January 2008.