27 August 2007

At its meeting on 27 August 2007, the Monetary Council reviewed the latest economic and financial developments and voted to maintain the central bank base rate at 7.75%.

The Council also discussed the August 2007 issue of the Bank’s Quarterly Report on Inflation.

The Monetary Council continues to believe that the 3% medium-term target for inflation will be met in 2009. The rate of consumer price increases is likely to moderate more slowly in 2008 than expected earlier, due mainly to temporary factors outside the influence of monetary policy. In the August Report projection, inflation falls to below 3% in 2009, mainly reflecting transient effects. There has recently been a marked, though temporary, deterioration in the domestic economy’s growth prospects; and the level of output may lag behind the longer-term trend over the forecast period.

In the Council’s judgement, the supply shock affecting output growth in agriculture will prove short-lived. However, the cyclical indicators suggest that the greater-than-expected decline in demand may also have played a role in the recorded slowdown in GDP growth in Q2.

This larger fall in demand may pull down on inflation over the longer term. But in the short term consumer price developments are affected negatively by the supply shocks to the economy. Rises in agricultural prices and the price of oil are likely to put upward pressure on inflation in 2008; however, the expected reversal of rises in food prices may contribute to inflation falling below target in 2009. Consistent with its earlier practice, the Monetary Council does not wish to respond to – largely temporary – price fluctuations triggered by short-lived supply shocks.

The inflationary effects of cost and supply shocks of the past year may only unwind simultaneously with a rapid adjustment of wage growth. There are signs that the rate of wage growth may have started to moderate in 2007 H1. The Monetary Council continues to monitor closely indirect inflationary effects induced by expectations and wage developments. In the Council’s view, the greater-than-expected slowdown in economic growth and the strong disinflationary effect of the fall in demand continue to represent downside risks.

The financial market turbulence stemming from the problems in the US sub-prime mortgage market has contributed significantly to uncertainty in the global investment environment, leading to a rise in the required risk premium on forint assets. However, the Council believes that the imbalances in the domestic economy have recently diminished considerably. This, in turn, has reduced Hungary’s vulnerability to external shocks.

In line with the prospects for inflation and the economy, the Monetary Council continues to believe there is room for further reductions in the central bank base rate in the future. However, a great degree of caution is needed in making monetary policy decisions, given the considerable uncertainty in the international environment.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 September 2007.


Monetary Council