21 December 2009

At its meeting on 21 December 2009, the Monetary Council reviewed the latest economic and financial developments and decided to reduce the central bank base rate by 25 basis points from 6.50% to 6.25%, with effect from 22 December 2009.

In the Council’s judgement, Hungarian growth is likely to resume in the middle of 2010 as the economy recovers from this year’s sharp downturn. Inflation is expected to remain elevated temporarily due to the tax increases, and then to move materially below the Bank’s 3% target in the second half of next year. There has been no further increase in global risk appetite in recent months, with a considerable degree of uncertainty surrounding future developments in international financial markets.

Rising activity abroad and declining demand at home continue to shape Hungarian economic performance. Prompted by the deteriorating labour market outlook, falling real incomes and the contraction of lending, households are scaling back consumption spending and companies are postponing investment plans. The output of exporting industries has recently begun to rise, owing to a rebound in external demand; however, this has only been sufficient to slow the pace of decline in GDP. Due to the weakness of domestic demand, the Hungarian economy is expected to recover with some lag compared with developed countries and the economies of Central and Eastern Europe. The country’ external financing requirement has fallen considerably in response to the above adjustment process and the pick-up in economic activity abroad.

The key factor driving movements in the prices of products affecting significantly the medium-term outlook for inflation has been the decline in demand. The increase in inflation in November was largely related to rises in the fuel price index, a component excluded from core inflation. The Monetary Council retains its view that inflation may fall substantially below the 3% target over the medium term.

International investor sentiment and assessments of risks associated with Hungarian financial assets have both been very volatile over the recent period. Investor concerns about the sustainability of government debt in a number of countries have come to the fore. In order to reduce Hungary’s high government debt and vulnerability to external shocks, it is particularly important to maintain a disciplined, long-term sustainable fiscal policy.

Changes in perceptions of risks associated with the Hungarian economy have made it possible to significantly reduce the central bank base rate in recent months, in line with the outlook for inflation and growth. In the Monetary Council’s judgement, the uncertainty surrounding future developments in global financial markets has allowed a smaller reduction in interest rates than in the past.

In view of the above considerations, the Monetary Council decided to reduce the base rate by 25 basis points. Even if justified by the outlook for inflation and the economy, interest rates may only be reduced further if changes in perceptions of risks associated with the economy allow it.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 January 2010.


Monetary Council