27 March 2012

At its meeting on 27 March, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 7.00%.
The Council also reviewed the March issue of the MNB’s Quarterly Report on Inflation prepared by Bank staff.

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 over the entire period. The consumer price index is expected to rise significantly, reflecting the effects of increases in VAT and excise duties as well as the rise in oil prices and the depreciation of the forint exchange rate in the second half of 2011. In the longer term, however, the path of consumer prices is likely to be dominated by the disinflationary impact of weak domestic demand.

Consumer prices rose more sharply in the first few months of the year than projected in the December Report. In part, that may have reflected the rapid pass-through of increases in indirect taxes and higher underlying inflation. Despite weak domestic demand, firms with declining profitability may be able to pass on some of the increase in their costs due to the weaker exchange rate and rising commodity prices, as suggested by the rises in tax-adjusted core inflation in January–February. In the Council’s judgement, however, the disinflationary impact of weak domestic demand is likely to be a key determinant of consumer prices as the effects of the indirect tax increases and the depreciation of the exchange rate wane. Nevertheless, special attention should be given to the inflationary effects of rising oil prices.

The slowdown in global growth and the euro-area debt crisis point to a weaker outlook for activity in Hungary’s export markets. Moreover, balance sheet adjustment by the European banking sector continues. In the current global environment, export growth is likely to weaken and tight credit conditions to remain. However, Hungary’s export markets and the rate of export growth may recover gradually from mid-2012. Domestic demand is expected to decline further. The uncertain global and domestic economic environment and the tightening in credit conditions will restrain investment growth. Household consumption is likely to remain low, due to the uncertain prospects for income growth and tight fiscal policy. However, Government measures aimed to ensure that the deficit target is met are required for perceptions about the Hungarian economy to improve. Labour market conditions are expected to be loose over the period ahead, as the increase in activity is likely to be associated with subdued demand for labour.

Perceptions about the Hungarian economy have changed little in the past month, despite the increase in global risk appetite. Global financial markets have been highly volatile over the past six months. The Monetary Council therefore continues to consider it important that an agreement between the Government, the EU and IMF is reached as soon as possible, in order to reduce the risks associated with financing the government debt. The Council noted the important structural measures taken by the Government to reduce the budget deficit.

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 underlying inflation continue to warrant a cautious policy stance.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 April 2012.

Monetary Council