24 August 2009

At its meeting on 24 August 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 8.50% to 8.00%, with effect from 25 August 2009.

At its meeting, the Monetary Council also discussed the August 2009 issue of the Bank’s Quarterly Report on Inflation.

In the Council’s assessment, although the global economic environment remains uncertain, it has stabilised somewhat over recent months and there has been no further deterioration in economic prospects. However, the global and domestic economies are unlikely to recover rapidly in the near term. Hungarian economic growth is expected to resume in 2010. Inflation is likely to rise above the medium-term target temporarily, reflecting the effects of increases in indirect taxes, and move substantially below it in the second half of 2010.

The decline in domestic demand played a greater role in the contraction of the domestic economy than earlier expected, due primarily to sharp reductions in firms’ stocks and larger-than-anticipated cutbacks in investment. In addition, household consumption continued to decline rapidly. Rising uncertainty about the outlook for employment and incomes, coupled with tightening credit conditions, prompted households to increase savings. As a result of adjustment in the private sector, the external financing requirement declined markedly.

In the Council’s judgement, the series of inflation shocks potentially resulting in an increase in economic agents’ longer-term inflation expectations poses the greatest risk to the longer-term outlook for inflation. However, domestic demand has fallen to an extent that, apart from the effects of the tax changes, a low inflation environment can be expected even taking into account that risk.

After improving significantly in previous months, international investor sentiment and assessments of risks associated with the Hungarian economy have not changed materially over the past month. The substantial decline in the external financing requirement and the resumption of government borrowing directly from the bond market also contributed to an easing of concerns about the country’s external financing.

The Monetary Council decided to reduce the central bank base rate after considering the recent developments in the economy and inflation and in assessments of risks. Monetary policy may be eased further if it does not pose a threat to the inflation outlook and if assessments of risk allow it.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 16 September 2009.


Monetary Council