31 March 2008

1 At its meeting on 31 March 2008, the Monetary Council reviewed the latest economic and financial developments and voted to raise the central bank base rate by 50 basis points, from 7.50% to 8.00%, with effect from 1 April 2008.

2 The Council maintains its view that Hungarian economic growth is likely to be below potential and inflation to fall only slowly this year and in 2009. Upward pressures on inflation of the fiscal adjustment measures are wearing off; however, the further reduction in inflation has more recently been held back by domestic and international cost shocks.

The Council has on several occasions expressed that it does not intend to offset the temporary effects of cost pressures; rather, it monitors closely any potential second-round effects that may occur. Although inflation shocks have so far been concentrated on the prices of a specific range of products, new pressures – particularly those from rises in producers’ energy prices and wage costs – may have more persistent and broader inflationary effects. According to January 2008 wage data, the introduction of the guaranteed minimum wage and the increase in the national minimum wage both led to a stronger-than-expected rise in private sector average earnings. This has added to cost-push inflationary pressure, despite an easing in labour market conditions on the back of the fall in employment. The slow disinflation process has amplified the second-round effects on prices of the cost shocks, the reason being that, as a result, expectations may become stuck at a high level.

Hungarian government securities yields have increased markedly across the maturity spectrum in the past month. Closely related to the financial shock emanating from the US mortgage market, the re-pricing of risks has continued, leading to sharp rises in yields on more risky financial assets. Although non-fundamental factors may have also played a role in the rise in domestic government securities yields, there is clear evidence of a increase in the risk premium on forint assets recently.

In the Council’s judgement, the risk of inflation remaining persistently above 3 per cent and the rise in the risk premium on forint assets have both pointed to the need to raise the central bank base rate. And the Council will stand ready to take further actions in order to met the 2009 inflation target.

3 The abridged minutes of today’s Council meeting will be published at 2 p.m. on 18 April 2008.