8 March 2009

At its extraordinary meetings on 6 and 8 March 2009, the Monetary Council reviewed the latest money and capital market developments.

The Hungarian forint has come under selling pressure recently, due to a reduction in global willingness to take risk as well as a deterioration in sentiment towards economies of the Central and Eastern European region, and the Hungarian economy in particular. The depreciation of the forint has gathered pace in recent weeks, which the Council believes to have been caused mainly by a departure of expectations from economic fundamentals.

In the Council’s judgement, it is important to stress that, based on data for recent months, domestic institutional sectors have already started to adjust to the changed international financing environment. The combination of rising domestic savings and tight fiscal policy is expected to contribute to an improvement in Hungary’s external balance and a rapid and significant reduction in the country’s external financing requirement. In addition to the significant line of credit available from international financial institutions and the adequate level of central bank foreign exchange reserves, funding from foreign parent banks to domestic banks continues to be high and is rolled over continuously. All these act to reduce Hungary’s dependence on borrowing in international capital markets.

In the Council’s view, conditions in the domestic banking sector continue to be stable, despite the recent depreciation of the forint; however, the downward pressure on the exchange rate has a harmful effect on the capital position of the Hungarian financial intermediary system over the medium term. If the weakness of the forint proved persistent, it would jeopardise the Bank’s inflation target directly, through import prices, and through expectations as well as other indirect channels.

The Monetary Council will make efforts to bring financial market developments back into line with the outlook for the real economy. To this end, the Bank intends to encourage banks to increase their recourse to its forint and foreign currency liquidity-providing instruments introduced recently, will soon be converting EU funds in the market and stands ready to use the full range of monetary policyinstruments at its disposal.

Monetary Council