The Monetary Council discussed and commented on the September 2011 issue of the MNB’s Quarterly Report on Inflation prepared by Bank staff.

In the Council’s judgement, Hungarian economic growth is likely to remain subdued over the next two years, with the level of output remaining below its potential throughout the period. Medium-term upside risks to inflation have fallen due to weak domestic demand. Inflation may fall back to 3% by the beginning of 2013, as the effects of cost shocks and increases in indirect taxes wear off. The Monetary Council is closely monitoring developments in tax-adjusted core inflation, in addition to movements in the consumer price index.

The deteriorating outlook for economic activity points to a decline in inflation from the demand side. Higher commodity and fuel prices in the first half of the year fed through to core inflation, as reflected mainly in rises in processed food prices. The increases in VAT and excise duties are likely to raise the consumer price index considerably for a short period; however, inflationary pressures from the demand side continue to be extremely low. Subdued inflationary pressures from the demand side are likely to become the dominant factor in developments in annual CPI inflation, as the impact of the cost shocks and the increase in indirect taxes gradually fade.

In the Council’s judgement, the outlook for Hungarian growth has deteriorated significantly in the past quarter. Domestic demand is likely to be persistently low, reflecting the prolonged process of balance sheet adjustment by households and the further tightening in credit conditions. It is unlikely that the reduction in personal income taxation and disbursements to members of their private pension fund contributions this year will be sufficient to boost domestic household consumption, which has been subdued for some time. The high degree of uncertainty surrounding the outlook for incomes and high levels of debt are impeding the recovery in consumption growth.

Investment activity is likely to be extremely subdued due to uncertainty in the business climate, the tightening in credit conditions and the deterioration in the outlook for activity. Large individual investment projects implemented in manufacturing will only partly offset weak investment activity. Service sector investment is unlikely to pick up, due to a significant margin of spare capacity. Household investment is likely to reach its trough at the end of this year, but is expected to remain flat thereafter.

The slowdown in global growth and the prolonged problems of the European banking sector point to a more adverse external environment in Hungary’s export markets, which is likely to weigh on domestic export growth. However, the large investment projects, mainly in the car industry, will partly offset this effect as they gradual start to produce output. As a result, Hungary’s export market share may rise in 2012. Exports are likely to remain the driver of growth over the next two years, despite the slowdown in external demand.

Risk premia have risen in the past month and the forint exchange rate has weakened. The increase in perceptions of the risks associated with the Hungarian economy was mainly accounted for by the deteriorating outlook for global growth and the protracted debt crisis of the euro area. The option for households to repay their foreign currency debt at below-market rate represents a significant source of uncertainty in terms of Hungary’s risk perceptions. There is a risk that the programme will cause a major setback in the domestic banking sector’s ability to lend, and companies’ reduced access to bank credit may lead to a further deterioration in the outlook for Hungarian growth. In the Council’s judgement, increased volatility in financial markets observed recently may persist for some time.

The Monetary Council has decided to leave interest rates unchanged in light of the above considerations. Uncertainty in financial markets warrants a wait-and-see policy stance.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 October 2011.


Monetary Council