26 March 2007

1    At its meeting on 26 March 2007, the Monetary Council considered the latest economic and financial developments and voted to leave the central bank base rate unchanged at 8.00%.

2    In the Monetary Council’s judgement, information received in the past month provides evidence that the Hungarian economy continues to grow along the central path assumed in the February issue of the Quarterly Report on Inflation, and consequently, inflation may ease back close to the 3% medium-term target in 2008 H2. However, the latest data do not appear to have reduced the risks to the central projection. There was a fall in the market component of the consumer price index, and particularly in the month-on-month rate of core inflation, which may imply that considerable price pressures have not yet emerged in the Hungarian economy over and above the one-off upward impact on prices of the Government’s measures.

      One source of uncertainty is that, although the January growth rate of regular pay in the private sector may pose an upside risk to the outlook for inflation, the detailed 2006 GDP data reflect a gradual easing in domestic demand. Pay growth in some sectors of the economy is inconsistent with the slowdown in productivity growth and the expected decline in demand. It is still difficult to make an accurate measure of wage inflation and its likely impact, as adjustment to the changes in labour market and tax regulations may bias statistical data upwards.

      According to the latest data, the fall in certain components of domestic demand within the overall pattern of growth was even more marked than in the past. On the demand side, this may have a dampening effect on inflation and reduce potential upward pressure caused by higher wage inflation. However, it may lead to a fall in firms’ profitability, which, in turn, may add to the risk of a pronounced decline in economic growth and employment.

      The fall in the risk premium on forint-denominated government bonds over the recent period may also suggest an improvement in investors’ sentiment about the long-term sustainability of the fiscal adjustment measures. This may provide increased room for manoeuvre in interest rate policy in the future.

      Taking all these factors into account, the Monetary Council decided to leave the Bank’s key interest rate unchanged.

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


Monetary Council