25 August 2008

1   At its meeting on 25 August 2008, the Monetary Council reviewed the latest economic and financial developments and left the central bank base rate unchanged at 8.50%.

The Council discussed the August 2008 issue of the Bank’s Quarterly Report on Inflation.

In the Council’s view, consistent with the projection presented in the Report, Hungarian economic growth will continue to be subdued and inflation will fall slowly over the period to 2010. In the current projection, inflation exceeds the 3 per cent target in 2009, before easing back to it in 2010, as an effect of domestic and foreign cost shocks. The level of output is likely to remain below its potential on the horizon relevant for monetary policy, which, in turn, will help to bring inflation down.

Global factors contributed significantly to inflation exceeding the medium-term target throughout the second quarter of 2008. The tightening monetary conditions partly offset the effects of a higher international inflation environment; however, on balance, prices of imported goods in domestic currency terms continued to rise.

There has been unfavourable news for global economic activity in recent months. The faster-than-expected slowdown in global activity may contribute to a fall in international commodity and energy prices and, ultimately, to disinflation in Hungary.

Aiming to prevent inflation expectations from becoming stuck at a high level continues to be the Monetary Council’s most important task. The underlying reason for this is that if economic agents in their wage and pricing decisions relied more heavily on past inflation than the assumption in the current projection, disinflation would be slower and entail higher real economic costs.

Taking all these into account, the Monetary Council decided to leave the Bank’s key interest rate unchanged. Maintaining tight monetary conditions is justified as long as there are no clear indications, both internationally and domestically, of a sustained decline in upside risks to inflation.

2   The abridged minutes of today’s meeting will be published at 2 p.m. on 14 September 2008.