24 July 2012

At its meeting on 24 July 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, economic output is likely to fall this year, with growth only expected to resume in 2013. The level of output will be below its potential in the period ahead. The consumer price index is expected to remain above the inflation target over the policy horizon, reflecting the effects of tax changes and other administrative measures.

CPI inflation in June was higher than previously expected. Measures capturing underlying inflation developments remained at low levels, with transient factors related to a couple of items probably contributing to the pick-up in inflation in the month. Inflationary pressures from the real economy continue to be subdued due to weakening demand, but the tax increases in early 2012, the measures included in the Structural Reform Programme and the latest announcement of an increase in excise duties are likely to cause inflation to exceed the target over a sustained period. The consumer price index is expected to remain significantly above the medium-term target into 2013 as a result of a series of increases in indirect taxes affecting consumer prices. Although this is unlikely to fuel second-round effects due to persistently weak demand and slack in the labour market, meeting the inflation target is expected to be delayed.

Hungarian export growth is weighed down by the slowing in external demand, and, moreover, there is significant uncertainty around the recovery in Hungary’s export markets expected from the second half of this year. However, the pick-up in production following the build-up of manufacturing capacities over the past quarters may offset the effects of the slowdown in external demand. Domestic demand is likely to fall further in the coming quarters. Persistently high unemployment, falling real incomes and precautionary behaviour by households suggest that consumption will decline over the period ahead. Investment is likely to remain subdued, reflecting the weak outlook for economic activity, the unpredictable business environment and tight credit conditions.

Perceptions of the risks associated with the Hungarian economy have improved recently, but financial markets remain fragile. Growing risks related to the sustainability of sovereign debt in some euro-area countries may negatively affect premia on Hungarian financial assets; however, stabilisation of fiscal positions in euro-area countries may contribute to an improvement in perceptions about Hungary. The Monetary Council welcomes the start of negotiations between the Government and the EU and IMF. Reaching an agreement in the current volatile environment could lead to a sustained improvement in risk perceptions. It is very important in terms of the future evolution of the risk premium that the Government remain committed to meeting the fiscal deficit target.

The Monetary Council has decided to leave the base rate unchanged in light of the above considerations. 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. The Council will make every effort to ensure that the upward impact on prices of the measures announced by the Government does not have any second-round consequences and inflation returns to levels consistent with the medium-term target as the direct effects of the measures wear off.

The volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance. The Council will consider a reduction in interest rates if Hungary’s risk premium falls persistently and substantially and the outlook for inflation improves.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 August 2012.

Monetary Council