29 October 2007

At its meeting on 29 October 2007, the Monetary Council reviewed the latest economic and financial developments and voted to maintain the central bank base rate at 7.50%.

In the light of fresh economic data released since the previous policy meeting, the Monetary Council continues to assume that the Bank’s 3% medium-term inflation target will be met in 2009, in which the rate of growth remaining weak by the standard of recent years will play a role. However, a necessary condition for meeting the inflation target is that one-off price increases should not lead to a sustained rise in expectations.

Based on the latest information available, the Bank expects food prices to rise significantly over the short term. Food price inflation can be related in part to worse-than-usual weather conditions; however, the sustained increase in international demand may also play a part, and therefore, it may also affect the medium-term prospects for inflation. But other core inflation components do not point to further inflationary pressure.

Private sector wage inflation eased back in August, mainly explained by employers in 2006 bringing forward bonus payments in anticipation of changes in regulations. Consequently, annual wage growth is expected to be very volatile over the remainder of the year. After adjusting for these factors, the outlook is for wage growth to ease gradually. Further moderation in nominal wage growth is a prerequisite for sustained low inflation. Wage increases consistent with productivity gains reduce the risks that a series of shocks to inflation from agriculture, energy prices and other demand factors could lead to a higher rate of price increases over a protracted period and inflation expectations could become stuck at high levels.

Recent financial market developments suggest that the international turbulence stemming from problems in the US mortgage market has so far had a temporary effect on market sentiment towards forint-denominated investments. The current macroeconomic and financial environment may leave scope for the Council to reduce the base rate; however, considering the upside risks to inflation and uncertainty surrounding the global investment climate, the Monetary Council will continue to exercise care in setting interest rates.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 November 2007.


Monetary Council