At its meeting on 19 July 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 Monetary Council notes with regret that the completion of the review of Hungary’s existing  credit line with the IMF and the EU has been postponed, as more time is needed for the Government to draw up a programme which is consistent with the approved Convergence Programme and the recommendations to correct the country’s excessive deficit, leads to a lasting improvement in fiscal sustainability and is based on structural measures. It is reassuring that the Government has declared its commitment to continuing the fiscal consolidation process. It is important that measures are taken both to reduce the government deficit on a sustained basis and improve the economy’s growth potential. Meeting the deficit targets, considered low compared with those in other countries of the European Union, may help place the public sector debt-to-GDP ratio on a declining path.

The domestic economy has started to grow again, which supports the continuation of the fiscal consolidation process. The Monetary Council maintains its view that domestic economic activity continues to be shaped by the divergent trends in external and domestic demand. The latest data for industrial production and the trade balance are consistent with the view that the strength of external activity has been the driving force behind domestic economic growth. However, domestic demand growth is lagging 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 determined by the contrast between rising economic activity abroad and the further decline in domestic consumption demand. Recent inflation data continue to suggest that weak domestic demand will exert significant downward pressure on prices in the period ahead, but looking forward the continued weakness of the forint may generate inflationary pressure. In terms of meeting the target in 2012, a further risk is that inflation expectations will not be anchored due to persistently above-target inflation.

In the current unfavourable international environment, the risk premia on Hungarian financial assets continue to be high and volatile, in part reflecting concerns over the domestic fiscal path. The Monetary Council will make efforts to stem any excessive fluctuations in the forint exchange rate in the period ahead. The Council has therefore decided to continue the conversion of EU funds in the domestic market. A sustained increase in risk premia may make it necessary to raise the central bank base rate.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 August 2010.

Monetary Council