22 February 2010

At its meeting on 22 February 2010, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 25 basis points from 6.00% to 5.75%, with effect from 23 February 2010.

The Monetary Council discussed the February 2010 issue of the Bank’s Quarterly Report on Inflation.

In the Council’s judgement, Hungarian growth is likely to resume in the middle of 2010 as the economy recovers from the sharp downturn of 2009. Inflation is expected to remain elevated temporarily due to the increases in taxes and administered prices, and then to fall significantly in the second half of the year, before dipping below the Bank’s 3% target in 2011. There remains considerable uncertainty about future conditions in global financial markets.

Hungary’s GDP continued to fall in 2009 Q4. However, the pace of decline moderated considerably, mainly reflecting a pick-up in exports in the wake of the recovery in external demand. By contrast, the contraction in domestic demand is continuing. In consequence, the recovery in Hungary is likely to lag behind that of developed economies and the countries of Central and Eastern Europe. The diverging trends in demand abroad and at home have led to a further improvement in Hungary’s external balance, with the current account registering a substantial surplus since mid-2009. This uneven pattern may continue in the medium term. The Council therefore expects the economy to operate without reliance on foreign funding in coming years.

The increase in CPI inflation in the past three months was attributable mainly to rises in the prices of items excluded from the core measure. Services price inflation declined to a historic low. Taking all these factors into account, the Monetary Council continues to judge that inflation may fall below the target over the next two years, albeit at a somewhat slower pace than earlier expected.

Global investor sentiment weakened over the past month as concerns about the sustainability of the path of government debt in a number of developed economies again came to the fore. At the same time, assessments of risks associated with Hungarian financial assets barely changed. The significant improvement in Hungary’s external balance has reduced the vulnerability of the economy; however, the high level of debt and weak indicators of economic activity continue to pose risks. In order to reduce the country’s vulnerability to external shocks, it is particularly important to maintain a disciplined, long-term sustainable fiscal policy.

Based on the above considerations, the Monetary Council has decided to reduce interest rates by 25 basis points. The Council judges that the room for manoeuvre in interest rate policy has narrowed, due to increased uncertainty in international financial markets. Even if justified by the outlook for inflation and the economy, interest rates may only be reduced further if changes in perceptions of risks associated with the economy allow it.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 17 March 2010.


Monetary Council