28 September 2009

At its meeting on 28 September 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 8.00% to 7.50%, with effect from 29 September 2009.

The Monetary Council expects domestic economic growth to resume in the middle of 2010. Inflation is likely 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. The global financial environment has continued to stabilise over the past month; however, the risks of future shocks should not be ignored.

In the Council’s judgement, the medium-term outlook for inflation is favourable. The decline in demand has been a major contributing factor, which has impeded firms’ ability to raise prices. The July–August inflation data have also suggested that, as a result of weak demand, firms were able to pass on the VAT increase to consumers only partially. However, one factor continuing to pose a risk to the longer-term outlook for inflation is that the successive upward shocks to inflation could lead to a lasting increase in economic agents’ inflation expectations.

Real economic adjustment to the consequences of the crisis has also been reflected in the sharp improvement in external balance. Disciplined fiscal policy also played a significant role in the improvement in external balance. However, there is uncertainty over the longer-term sustainability of certain non-structural measures included in the fiscal adjustment package, which, in turn, may make it difficult to achieve and maintain long-term macroeconomic balance.

Labour market adjustment has been slightly less pronounced than expected: wages have grown at high rates in recent months relative to the performance of the economy. Long-term price stability cannot be achieved if productivity growth is persistently exceeded by real wage growth. Next year’s tax reductions are likely to provide an opportunity for employers and employees to reach an agreement to maintain gross earnings at their current level, taking into account the outlook for inflation. Wage moderation may help improve corporate sector profitability, and, consequently, it may contribute to maintaining employment and hence generate a faster economic recovery.

Global risk appetite has increased further in recent months, as evidenced by declines in government securities yields and interbank lending rates in Hungary. The forint exchange rate fluctuated in a lower range than in previous months, and the risk premium on Hungarian sovereign debt returned to levels seen before the failure of Lehman Brothers. However, giving reason for caution is that international capital market conditions remain fragile.

The Monetary Council decided to reduce the central bank base rate after considering the recent developments in the real economy and inflation and improved perceptions of sovereign risk. Interest rates may be reduced further, if this is allowed by the inflation outlook and shifts in risk sentiment.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 October 2009.


Monetary Council