23 November 2009

At its meeting on 23 November 2009, the Monetary Council reviewed the latest economic and financial developments and decided to reduce the central bank base rate by 50 basis points from 7.00% to 6.50%, with effect from 24 November 2009.

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

The Council’s judgement is that 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 exceed the medium-term target temporarily due to the indirect tax increases, and then to move materially below it in the second half of next year. Conditions in the global financial system have improved gradually over the past few months, reflecting the buoyancy of the global economic outlook; however, some uncertainty about the sustainability of these developments remains.

The Hungarian economic scene has been dominated by a sharp contraction in domestic demand and signs of a pick-up in economic activity abroad. In response to the deterioration in the labour market outlook and declining lending activity, households have scaled back consumption spending and companies have postponed investment plans and run down their stocks. The faster-than-expected recovery in external demand has only been sufficient to slow the pace of decline in GDP. The fall in domestic demand, largely due to the above adjustment process, and the pick-up in economic activity abroad have resulted in a considerable reduction in the country’ external financing requirement.

The outcomes for consumer price inflation over the past few months were below expectations. 

Continued subdued inflation despite the indirect tax increases is attributable mainly to the restraining effect of weak demand. In the Monetary Council’s view, inflation may fall substantially below the 3% target over the medium term.

Recent labour market trends suggest that companies are adjusting to weak domestic and foreign demand by moderating earnings growth and sharply reducing employment. Setting wages by taking into account the protracted recession and the expected low inflation environment may help keep jobs and contribute to a faster economic recovery.

The external vulnerability of the Hungarian economy may only be reduced, if a sustained improvement in external balance is achieved. Households’ increased propensity to save is expected to continue to help restore external balance. Maintaining an extremely disciplined fiscal policy approach is required in order to gradually reduce the country’s vulnerability to shocks and achieve the budgetary targets set by the authorities.

Global risk appetite has increased significantly in recent months, which has led to a decline in yields required by investors for holding Hungarian financial assets. However, there is a risk that the pace of the recent increase in risk appetite has been faster than would be justified by the improvements in global economic fundamentals. The domestic economy continues to be vulnerable to shocks. This, together with the above risk, requires caution in policy-setting.

The Monetary Council decided to reduce the central bank base rate after considering the recent developments in the economy and inflation, as well as improvements in perceptions of risk. Interest rates may be reduced further, if this does not threaten the inflation outlook and if shifts 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 9 December 2009.


Monetary Council