22 January 2007
1. At its meeting on 22 January 2007, the Monetary Council considered the latest economic and financial developments and voted to leave the central bank base rate unchanged at 8.00%.
Economic data released since the latest policy meeting have not altered the Monetary Council’s view of the Hungarian economy materially. According to the underlying measures of inflation, the general picture is one of a significantly higher inflation environment than the level implied by price stability. In contrast with individual factors driving price developments, for example, consumption demand, the exchange rate and oil prices, which point to a slowdown in inflation, the rate of wage growth continues to be higher than expected.
The latest wage data indicate that the growth of wages in the private sector has been high recently. This strong growth has emerged against the background of a loosening of labour market conditions. However, it is too early to tell whether this process reflects a deterioration in inflation expectations or an adjustment to changes in the regulatory environment.
Recent output data have reinforced earlier signs of a widening in the gap between external and domestic demand growth. The rise in the volume of output in November suggests that industrial activity remains buoyant.
In the Council’s judgement, the risks to future inflation are significant and highly likely to persist in the months ahead. In view of the uncertainties, the Council will continue to monitor inflation developments carefully and will aim to prevent potential upward effects of one-off measures on the general price level through higher expectations from triggering a spillover into higher inflation.
2. The minutes of today’s Council meeting will be published at 2 p.m. on 16 February 2007.
3 . The Council’s evaluation of the achievement of the 2006 inflation target
The annual rate of inflation in December 2006, at 6.5%, was higher than the 3.5% target set for end-2006, and was also outside the ±1% tolerance band. In 2006, the inflation target could not be met in large part because of factors outside the influence of monetary policy.
The average rate of consumer price inflation in 2006 was 3.9% and that of core inflation was 2.3%.
As a positive effect of factors determining inflation, the rate of price increases had come close to the level implying price stability by end-2005 and early 2006, with the risks to economic balance remaining particularly pronounced. The favourable underlying developments in, and the benign outlook for, inflation, coupled with the necessity of fiscal adjustment, characterised the picture of the Hungarian economy up to mid-2006. A slowdown in tradables inflation was the major driving force behind good inflation performance, which was explained by the combination of a disinflation of tradable prices globally, Hungary joining the European Union and the transformation of trade patterns in the wake of the accession. In addition, reaching a level close to price stability was also supported by the stable and strong exchange rate as well as by wage inflation which was becoming increasingly in tune with price stability.
Inflation reached a turning point in mid-2006, with inflationary pressures rising across a broad range of products. The Monetary Council expected the effects of intensifying competition in earlier years to unwind and core inflation to pick up. In mid-2006, however, there were signs suggesting that inflation would rise at a faster rate than expected earlier, due to the sharp increase in unprocessed food prices, the pick-up in wage inflation and the weakening exchange rate. From September, as a consequence of the measures taken by the Government, administered prices rose strongly, and the increase in indirect taxes affected a wide range of product prices. These measures contributed significantly to inflation in December exceeding the target by 3 percentage points. Beyond the direct inflationary effects, the measures may cause changes in pricing behaviour and wage agreements.
The Monetary Council, therefore, clearly reaffirms its commitment to meet the medium-term inflation target; and it will continue to aim to anchor inflation expectations and stabilise inflation around 3%.
MAGYAR NEMZETI BANK