27 September 2010

At its meeting on 27 September 2010, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 5.25%.

In the Council’s judgement, the Hungarian economy has begun to emerge from recession in 2010; however, output is likely to return to its potential level only slowly. Inflation is expected to ease back towards the Bank’s 3% inflation target on the horizon relevant for monetary policy, due to the persistent weakness of domestic demand. Heightened perceptions of the risks associated with the Hungarian economy reflect the uncertainty felt by market participants.

The near-term outlook for domestic growth continues to be shaped by the divergent trends in robust economic activity abroad and weak domestic demand. Strong external demand has been the main driver of Hungarian growth this year. Consumption demand has been flat because of households’ uncertain income prospects and rises in monthly instalments on foreign currency loans, and is only likely to contribute to growth from 2011.

The latest inflation data were consistent with the baseline projection in the latest Quarterly Report on Inflation. The effects of the weaker exchange rate are not yet reflected in consumer prices, but rises in food prices may add to inflationary pressure over the short term. Earnings data released since publication of the Report were more benign than expected. In the medium term, however, accumulated cost pressures at companies exercising restraint in their pricing policies may have an upward effect on inflation as demand gradually recovers. In terms of meeting the target, there is an upside risk that economic agents’ inflation expectations will not be well anchored due to persistently above-target inflation.

Global appetite for risk and perceptions of the risks associated with the Hungarian economy have been volatile over the past month. The appreciation of the Swiss franc against the forint in recent months has placed a particularly heavy burden on households with loans denominated in francs. Borrowers’ declining ability to repay their debts is likely to lead to a fall in bank earnings and a deterioration in credit quality, which, in turn, may prompt banks to reduce the supply of credit. The Government’s declared commitment to meeting the 3% deficit target for 2011 is key to preserving investor confidence. Information on the Government’s actions designed to meet the deficit target could contribute to an improvement in perceptions of the risks associated with the economy.

The Monetary Council has decided to leave interest rates unchanged in light of recent developments in inflation and a prolonged period of output below potential. The extent to which persistently weak domestic demand will dampen the pass-through of cost shocks into prices continues to be a source of uncertainty in assessing the outlook for inflation. If upside risks to inflation materialise or there is an increase once again in perceptions of the risks associated with the economy, it may be necessary to raise the central bank base rate.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 October 2010.


Monetary Council