23 February 2009

1 At its meeting on 23 February 2009, the Monetary Council reviewed the latest economic and financial developments and left the central bank base rate unchanged at 9.50%.

At its meeting, the Council also discussed the February 2009 issue of the Quarterly Report on Inflation.

Over recent months, global economic conditions and the prospects for growth both have deteriorated more sharply than previously expected. In 2008 Q4, output in the world’s major economies fell and growth in emerging economies slowed significantly. Governments of the world’s major economies announced substantial fiscal actions; however, so far these have had little practical effect.

The sharper-than-expected decline in external demand has led to a significant deterioration in Hungary’s growth prospects. The country’s exports are comprised mainly of capital goods and production equipment; and demand for these has fallen sharply recently, due to the recession in Europe. Based on available information, conditions in Hungary’s export markets are likely to deteriorate significantly in 2009, and consequently, a recovery in exports is unlikely before 2010 at the earliest.

The decline in bank lending activity may continue. On the demand side, there has been a fall in debtors’ willingness to borrow in response to the continued deterioration in the outlook for business activity. On the supply side, banks’ lower appetite to take risk has led to a decline in lending activity. In addition, the domestic financial sector has been forced to reduce its dependence on foreign funding, which may also lead to a curtailment of lending. The tightening of credit standards has been another factor contributing to a decline in lending. That, in turn, may result in reduced household consumption as well as in lower corporate investment and production.

The measures recently announced by the government are also likely to lead to a weakening in domestic demand. The government’s policy package, aimed at restoring fiscal balance, may contribute to an increase in the economy’s potential rate of growth; however, it is only likely to have an effect from 2011.

Declining demand suggests that inflation is likely to remain low. As an effect of the government measures, inflation may rise above the medium-term target temporarily; however, the annual rate of inflation is expected to fall significantly below 3 per cent in the second half of 2010. In the recession, the rise in inflation is most likely to have little lasting effect and it is unlikely to put the Bank’s inflation target at risk in the medium term.

The Hungarian economy must adapt to the recent changes in the financial and economic environment. Monetary policy attempts to mitigate the costs of adjustment using the instruments at its disposal. However, there has recently been a shift in willingness to take risks and in investors’ perception of risk associated with the Central and East European region, narrowing the room for monetary policy manoeuvre.

The Monetary Council took its decision to maintain interest rates after consideration of the projections for the economy and inflation as well as the need to preserve the stability of the financial intermediary system. The Council will continue to take particular attention to preserving the stability of the financial intermediary system and to ensuring that capital flows remain undisturbed.

2 The abridged minutes of today’s meeting will be published at 2 p.m. on 6 March 2009.


Monetary Council