24 November 2008

At its meeting on 24 November 2008, the Monetary Council reviewed the latest economic and financial developments and reduced the central bank base rate by 50 basis points from 11.50% to 11.00%, effective from 25 November 2008.
The Council discussed the November 2008 issue of the Bank’s Quarterly Report on Inflation.

The crisis hitting the international financial system has caused a fundamental change in the path of the Hungarian economy in recent months. In the period ahead, economic growth and inflation both may be sharply lower than expected earlier. With a temporary decline in economic activity followed by a slow recovery, inflation may fall significantly below the 3 per cent target on the horizon relevant for monetary policy.

The fall in investors’ willingness to take risk internationally and the sharp reduction in market liquidity make it necessary to reduce further Hungary’s external financing requirement, which may be achieved through a closing of the gap between incomes and expenditures of domestic economic agents. As a consequence of the financial crisis, growth in Hungary’s foreign trade partners has slowed significantly and, therefore, the correction of external and domestic demand is taking place simultaneously, making it particularly difficult to adjust.

The deterioration in the prospects for economic activity at home and abroad has led to a considerable shift in the future path of inflation compared with earlier expectations. In addition to a weakening in domestic demand, the reduction in inflationary pressures from the global economy, closely linked to oil, commodity and food prices, are expected to contribute to inflation easing back at a faster pace.
A month ago, amidst a general decline in willingness to take risk, the narrowing in liquidity worldwide and a lack of confidence in the country’s ability to finance its external debt, the exchange rate of the forint came under significant downward pressure – much greater than justified by economic fundaments. In these extraordinary circumstances, the Monetary Council decided to increase the base rate by 300 basis points on 22 October 2008, in order to preserve the stability of the domestic financial intermediary system, check capital outflows, prevent depreciation expectations from increasing further, as well as to make it more expensive to speculate against the forint.

The agreement reached with the International Monetary Fund and the government’s planned budgetary adjustment measures reduced the risks of financing the country’s external debt, which, in turn, increased the room for monetary policy manoeuvre. The Monetary Council therefore decided to reduce the base rate. Official interest rates can be reduced further if the risks around the persistence of capital inflows and the stability of the financial intermediary system continue to diminish.

The abridged minutes of today’s meeting will be published at 2 p.m. on 12 December 2008.