25 January 2010

At its meeting on 25 January 2010, the Monetary Council reviewed the latest economic and financial developments and decided to reduce the central bank base rate by 25 basis points from 6.25% to 6.00%, with effect from 26 January 2010.

In the Monetary Council’s judgement, Hungarian growth is likely to resume in the middle of 2010 as the economy recovers from last year’s sharp downturn. Inflation is expected to remain elevated temporarily due to the tax increases, and then to move materially below the Bank’s 3% target in the second half of the year. Global appetite for risk has been volatile in recent months, and there remains considerable uncertainty about future conditions in global financial markets.

Domestic economic performance has been driven by a modest pick-up in demand abroad and a continuing decline in demand at home, which, in turn, has contributed to a reduction in the current account deficit to close to balance. Hungarian economic recovery is likely to lag behind that of developed countries and the economies of Central and Eastern Europe on account of persistently weak domestic demand.

The decline in consumption has been a major factor shaping movements in the prices of products dominating the medium-term outlook for inflation. Items excluded from core inflation accounted for most of the increase in inflation over the past two months. The Monetary Council continues to expect inflation to fall substantially below the 3% target at a horizon out to 1–2 years.

The deterioration in global financial market sentiment and assessments of risks associated with Hungarian financial assets in December did not continue over the past month. However, investors continued to be concerned about the sustainability of government debt in a number of developed countries. In order to reduce Hungary’s high government debt and vulnerability to external shocks, it is particularly important to maintain a disciplined, long-term sustainable fiscal policy.

The Monetary Council saw scope for only a cautious reduction in interest rates, due to the uncertainty surrounding future developments in world financial markets. The Council therefore has decided to reduce the base rate by 25 basis points. 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 10 February 2010.

The Monetary Council’s assessment of inflation performance in 2009

In the Monetary Council’s assessment, the Bank’s inflation target was not met in 2009, despite the fall in consumer price inflation to close to the 3% target in early 2009. Subsequently however, inflation rose slightly above 5% in the second half, mainly on account of the effects of the tax changes in the course of the year. Nevertheless, the Council judges that inflation developments in 2009 brought about a market change compared with the previous period, given the break in the inflation inertia of previous years. This is most clearly reflected in the slowdown in services price inflation. After fluctuating around 5%–6% in previous years, the services price index eased back to stand close to 3% in 2009, after adjusting for the effects of indirect tax increases.

Trend inflation developments suggest that recently the inflation target has come within reach. Prior to the indirect tax increases, in 2009 H1, the annual price index was practically consistent with the inflation target; core inflation, excluding volatile items, was 3.2% on average in the period January–June. Short-run measures of inflation, adjusted for the effects of indirect tax increases, were below target throughout the second half of the year. Weak demand – driven by the severe economic downturn – has put downward pressure on inflation and has reduced the risk that inflation might be stuck temporarily at high levels. The Monetary Council will use its best efforts to help the Hungarian economy to move towards price stability. Achieving and maintaining price stability is the best contribution that monetary policy can make to growth and a predictable economic environment over the long term.


Monetary Council