26 April 2010

At its meeting on 26 April 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 5.50% to 5.25%, with effect from 27 April 2010.

In the Monetary Council’s judgement, Hungarian growth is likely to resume this year as the economy recovers from the sharp downturn of 2009. Inflation is expected to fall below the Bank’s target next year, reflecting the effect of weak domestic demand. There remains considerable uncertainty about future conditions in global financial markets.

The Hungarian economy is likely to continue to show the structural divergences in activity observed in 2009. Exports are expected to pick up, in contrast to domestic demand, which is unlikely to grow materially this year. In consequence, the recovery in the domestic economy is likely to lag behind that in the global economy and the countries of Central and Eastern Europe.

Developments in the prices of products determining the medium-term outlook for inflation continue to reflect the downward effect on prices of weak domestic demand. Services inflation has been falling steadily for some time. The tradables price index fell in March for the second consecutive month. In light of these developments, the Council continues to judge that inflation may begin to fall back towards the target from the middle of this year and then dip below it next year.

Global investor sentiment has improved further in the past month. This has also been reflected in the fall in risk premia on Hungarian financial assets. However, investor concerns over the sustainability of government debt in some euro area countries have remained, posing a threat to the persistence of the improvement in global conditions. The improvement in the country’s external balance has led to a reduction in Hungary’s earlier external vulnerability; however, its high aggregate indebtedness and generally 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 lower the central bank base rate by 25 basis points. Even though justified by the outlook for inflation and the economy, interest rates may only be reduced further if changes in perceptions about the risks associated with the economy allow it.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 19 May 2010.

Monetary Council