28 August 2012

At its meeting on 28 August 2012, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 25 basis points from 7.00% to 6.75%, with effect from 29 August 2012.

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, administrative measures and the increase in commodity prices.

CPI inflation in June and July was higher than previously expected, as a result of higher unprocessed food prices and the increase in excise duties in the course of the year. Inflationary pressures from the real economy continue to be subdued due to weakening domestic 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. Higher-than-expected global oil prices and the unfolding food price shock represent upside risks to inflation. The latter has been reflected in developments in unprocessed food prices in recent months. 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 the risk of second-round effects is low due to persistently weak demand and slack in the labour market, meeting the inflation target is expected to be delayed.

Second-quarter GDP data reflect a weakening in general economic activity. The contraction in output in the quarter implies that the economy is technically in recession. The sharp slowdown in external demand is pulling down on the outlook for Hungarian exports. The decline in industrial production continued, despite steady growth in capacity in the automobile industry. Falls in the construction sector, agriculture and retail trade outweighed the rise in vehicle production. Domestic demand is likely to fall further in the coming quarters. Investment will 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 fallen further recently; however, that improvement has been driven mostly by external factors. Positive international investor sentiment reflected announcements related to euro-area crisis management, but decision and implementation risks associated with measures designed to address problems related to sovereign debt sustainability within the euro area remained. The Government’s commitment to maintaining a sound fiscal policy and to reaching an agreement with the European Union and the International Monetary Fund is crucial in terms of the future evolution of the risk premium.

The Monetary Council has decided to reduce the base rate in light of the above considerations.

The Council will continue to closely monitor underlying inflation developments. Monetary policy can only be eased to the extent that supply shocks to the economy and the upward impact on prices of the Government’s measures do not lead to the build-up of second-round inflationary effects and perceptions about the Hungarian economy continue to improve.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 September 2012.

Monetary Council