21 June 2010

At its meeting on 21 June 2010, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 5.25%.

The Hungarian economy began to recover in early 2010 following last year’s sharp downturn. Inflation is expected to fall back to the Bank’s medium-term target next year as a result of weak domestic demand. In the wake of both global and country-specific developments, perceptions of the risks associated with the Hungarian economy have increased in the past month, and there is significant uncertainty about the future outlook.

The release of detailed 2010 Q1 GDP data underpinned the Council’s view of the outlook for growth. Last year’s structural divergences within the economy may remain: domestic demand growth is likely to lag behind the pick-up in exports and is only expected to make a material contribution to overall economic growth from 2011.

The inflation outlook is also being shaped by rising economic activity abroad and an associated increase in energy prices, as well as by the slow recovery in domestic demand. The inflation data for May support the view that weak domestic demand will continue to put significant downward pressure on prices over the next 18 months. Due to the effect of commodity prices on the items excluded from the core inflation measure, the medium-term inflation target may only be met next year. In terms of meeting the target in 2012, the possibility that economic agents’ inflation expectations will not continue falling in the context of a slower-than-expected decline in the consumer price index and a gradual pick-up in economic activity is an upside risk.

Concerns over fiscal sustainability continue to weigh on global risk appetite. Investors’ perceptions of the risks associated with the Hungarian economy have increased markedly recently, due to uncertainty surrounding domestic fiscal policy. In the current market environment, it is particularly important to maintain a disciplined, long-term sustainable fiscal policy. The Monetary Council welcomes the Government’s commitment to meeting the 2010 fiscal deficit target, and considers it important that the details of implementation are established as soon as possible. Further Government measures aimed at meeting the 2011 deficit target agreed with international organisations could contribute to a reduction in perceptions of risk.

In light of increased perceptions of the risks associated with Hungarian financial assets and inflation risks, the Monetary Council has decided to leave interest rates unchanged.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 July 2010.

Monetary Council