24 April 2012

At its meeting on 24 April 2012, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 7.00%.

In the Council’s judgement, the Hungarian economy is likely to stagnate this year, with growth expected to resume in 2013. The level of output will remain below its potential in the period ahead. The consumer price index is expected to rise significantly, reflecting the effects of increases in VAT and excise duties in 2011 and 2012 as well as the depreciation of the forint exchange rate in the second half of 2011 and the rise in oil prices in early 2012. The latest Government measures, announced as part of the Structural Reform Programme, are likely to result in an increase in inflation in 2013 while causing aggregate demand to contract, which in turn may reduce the risk of second-round effects on inflation.

The inflation data released over the past month was broadly in line with the projection in the March Quarterly Report for Inflation. The rate of increase of consumer prices slowed in March relative to levels experienced in previous months, as reflected in a decline in measures of underlying inflation. Recent real economy data confirmed that domestic industrial production growth stalled in early 2012, reflecting weak external demand conditions. That in turn may set back the recovery in the economy. The Council expects that activity in Hungary’s export markets will pick up gradually from mid-2012, which is likely to affect growth in exports. By contrast, domestic demand is expected to fall further in the coming quarters. Uncertainty surrounding the prospects for income growth and the contractionary effects of fiscal consolidation on aggregate demand continue to point to weak growth in investment and household consumption.

Government measures aimed to ensure that the deficit target is met are required for perceptions about Hungary to improve. One of the key challenges facing the economy is ensuring the sustainability of government debt, which requires that the country’s ability to attract capital and its long-term growth potential be improved. The structure of measures taken to meet the government deficit target is vitally important in this regard. In the Council’s view, it is important that the new taxes announced by the Government are introduced in a way which minimises their distorting effects on the economy.

Perceptions about the Hungarian economy have deteriorated in the past month, mainly driven by global factors, including problems with the sustainability of sovereign debt in some euro-area countries. Over the past few quarters, risk premia demanded by investors for holding Hungarian assets have remained stuck at high levels relative to the performance of the economy, which affects negatively the country’s ability to finance its debt. The Council therefore continues to consider it important that an agreement between the Government and the EU and IMF on the provision of a financial safety net for Hungary be reached as soon as possible. Such an agreement would reduce the risks associated with financing the government debt and slow the pace of withdrawals of foreign funding from the domestic banking sector, being one of the most important obstacles to economic recovery.

The Monetary Council has decided to leave the base rate unchanged. Monetary policy can best contribute to economic growth by maintaining a predictable economic environment, ensuring price stability and preserving the stability of the financial system. High volatility of risk perceptions and recent trends in underlying inflation continue to warrant a cautious policy stance. The Council will take all efforts to ensure that the measures announced by the Government do not contribute to medium-term inflationary pressure and inflation returns to levels consistent with the Bank’s medium-term inflation target, as the direct effects of the measures dissipate. In addition, the Council will give special attention to the impact of the Structural Reform Programme on perceptions of risks.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 May 2012.

Monetary Council