26 June 2012

At its meeting on 26 June 2012, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 7.00%.

The Monetary Council reviewed the June issue of the MNB’s Quarterly Report on Inflation prepared by Bank staff.

In the Council’s judgement, output is likely to fall this year, with growth only 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 remain above the inflation target for a protracted period, reflecting the effects of the tax changes and other administrative measures.

Although inflationary pressures from the real economy remain moderate, the increases in VAT and excise duties in early 2012 as well as the measures announced as part of the Structural Reform Programme continue to keep inflation above target. The tax measures directly affecting consumer prices are likely to raise inflation only temporarily. By contrast, the measures leading to increases in production costs for companies are expected to feed through to inflation gradually, and therefore may influence inflation over a longer horizon. But this indirect effect will be offset by falling domestic demand and slack in the labour market. Consequently, the price index is expected to fall back close to the target as the effects of increases in VAT and excise duties as well as the cost shocks wear off.

The significantly weaker-than-expected first-quarter GDP data partly reflected transient factors; however, the outlook for economic growth has also deteriorated over the entire forecast period. The sharp slowdown in external demand weakens the outlook for domestic exports and the recovery in Hungary’s export markets expected from the end of this year is surrounded by significant risks. However, the pick-up in production following the build-up of manufacturing capacities over the past quarters may mitigate the effect of the slowdown in external demand. Domestic demand is likely to fall further in the coming quarters. Persistently high unemployment, falling real incomes and the uncertain prospects for income growth point to declining household consumption 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. The Government’s measures to reduce the deficit are likely to lead to a further contraction in domestic demand.

Perceptions of the risks associated with the Hungarian economy have been volatile recently. Growing concerns over the sustainability of sovereign debt in some euro-area countries may adversely affect premia on Hungarian financial assets. The Council therefore continues to consider it highly important that an agreement between the Government and the EU and IMF is reached as soon as possible.

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 volatile risk environment and above-target inflation for an extended period continue to warrant a cautious policy stance. 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 effect of the measures wears off. 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 11 July 2012.

Monetary Council