25 June 2007

1. At its meeting on 25 June 2007, the Monetary Council considered the latest economic and financial developments and voted to reduce the central bank base rate by 25 basis points to 7.75%.

2. In the Council’s judgement, data for the past month provide evidence that inflation has passed its peak. The seasonally adjusted month-on-month rate of core inflation – which is a good guide to underlying inflation – has fallen to 3%, a level consistent with price stability. Against this background, the risk of inflation remaining stuck at elevated levels appears to have eased. Domestic demand has been rising at a moderate pace, broadly in line with the Council’s expectations.

      According to wage data for April, the rate of nominal wage growth in the private sector continues to rise; however, the changes to labour market and taxation rules distort the official numbers. After eliminating this effect using the approach outlined in the latest issue of the MNB’s Quarterly Report on Inflation, the rate of wage growth has not picked up further recently. In addition, the seasonally adjusted month-on-month rate of wage growth, based on regular pay in the private sector, also slowed. Statistical data derived from the latest labour market survey show that the services sector adjusted to past wage increases by reducing employment. Looking forward, this implies that unit labour costs will probably rise at a lower rate than assumed earlier, which, in turn, may also mitigate inflation risks. All this is reinforced by developments in the price index for services so far this year.

      The reduction in uncertainty around the outlook for inflation has made it possible for the Bank to reduce the policy rate, in line with the market’s favourable sentiment about forint-denominated assets. However, uncertainty around future inflation developments continues to warrant a cautious policy stance. Even with the market maintaining its overall positive sentiment about forint-denominated assets, further reductions in the Bank’s policy rate will only be possible if upside risks to inflation continue to diminish.

3. The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 July 2007.