23 March 2009

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

Over recent months, international investors’ willingness to take risk has declined sharply and sentiment towards Central and Eastern Europe has deteriorated, leading to a significant depreciation of the forint. Any further weakening in the exchange rate would have a harmful effect on the capital position of the domestic financial intermediary system in the medium term. In addition, its expected stimulative effect on output may be questioned.

In the Council’s judgement, the risk of an even deeper economic downturn than previously expected has increased. Manufacturing and market services slowed significantly in the final quarter of 2008, due to declining external demand and the contraction of lending. Households are adjusting to the shifts in international financing conditions and the deterioration in the prospects for income growth by curtailing consumption expenditures, which, in turn, is acting to reduce Hungary’s external financing requirement.

Inflation has fallen to a level consistent with price stability in recent months. However, this reflected contrasting developments in the economy. Services price inflation has been falling sharply for several consecutive months, owing to the disciplinary effect on pricing of the economic downturn. However, the pass-through of weaker exchange rates into tradables prices is adding to upside risks to inflation. In the short term, exchange rate depreciation contributes to an improvement in the profitability of exporting firms and the competitiveness of domestic producers against imports; however, its effect on growth may be offset by the fact that economic agents are suffering sizeable losses on their positions taken in anticipation of an appreciation. The depreciation of the forint has led to a slowing in lending by banks, and it may worsen their capital position over the medium term through a deterioration in the loan portfolio.

After consideration of the latest developments in the real economy and inflation as well as the need to preserve the stability of the financial intermediary system, the Monetary Council decided to leave interest rates unchanged. The Council will continue to focus on preventing a persistent deviation of financial market conditions from economic fundamentals. To this end, it is ready to use the full range of monetary policy instruments at its disposal.

The abridged minutes of today’s meeting will be published at 2:00 p.m. on 10 April 2009.


Monetary Council