29 March 2010

At its meeting on 29 March 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 5.75% to 5.50%, with effect from 30 March 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. Although the increases in indirect taxes and administered prices are still putting upward pressure on prices, inflation has increasingly been driven by weak domestic demand. In consequence, CPI inflation is expected to drop below the Bank’s medium-term target next year. There remains considerable uncertainty about future conditions in global financial markets.

The recovery in the domestic economy is likely to lag behind that in the global economy and the countries of Central and Eastern Europe. Growth may continue to reflect the structural divergences of 2009. Following the sharp decline last year, consumption is unlikely to increase materially, while exports are expected to pick up markedly.

Weak demand continues to have the greatest impact on developments in the prices of products shaping the medium-term outlook for inflation. Services inflation has been falling steadily. In February, tradable prices reversed their increase in the previous month. Taking all these factors into account, the Council continues to judge that inflation may begin to fall back towards the target from the middle of 2010 and then dip below it in 2011.

Global investor sentiment has improved in the past month, associated with a significant reduction in risk premia on Hungarian financial assets. Although investor concerns over the sustainability of government debt in some euro area countries have remained, they have not had a considerable impact on perceptions of risks associated with the economies of Central and Eastern Europe. In the Council’s judgement, however, there are questions over the sustainability of the recovery. Although the significant improvement in the external balance has reduced Hungary’s external vulnerability, 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 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 14 April 2010.

Monetary Council