28 February 2012

At its meeting on 28 February, 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, Hungarian economic growth is likely to pick up perceptibly in 2013. The level of output will remain below its potential this year and next. The consumer price index is expected to rise significantly, reflecting the effects of increases in VAT and excise duties as well as the depreciation of the forint exchange rate in the second half of 2011. However, low inflation dynamics due to weak domestic demand will be the main determinant of consumer prices as the effects of the indirect tax increases wane.

In January, consumer prices rose more strongly than expected, due in part to the sharp increase in fuel prices and higher underlying inflation. Interpreting the January data is surrounded by greater-than-usual uncertainty, due to the indirect tax changes; however, uncertainty may decrease as new data become available over the next few months. In addition to the consumer price index, the Monetary Council is also closely monitoring developments in tax-adjusted core inflation, which also rose in January.

The slowdown in global growth and the euro-area debt crisis point to a weaker outlook for activity in Hungary’s export markets, which in turn will contribute to a deterioration in the outlook for Hungarian economic growth. It is difficult to judge whether the better-than-expected preliminary GDP release for 2011 Q4 reflects a lasting trend. While exports contributed to growth during the final months of the year, domestic demand is likely to have remained subdued in 2011 Q4.

Looking forward, the uncertain global and domestic environment and the tightening in credit conditions will restrain investment activity. 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 Hungary to improve.

There has been an improvement in perceptions of the risks associated with the economy in the past month, as reflected in the appreciation of the forint exchange rate and the decline in risk indicators. This has been driven by favourable global developments, although country-specific factors related to expectations about an agreement with the IMF and EU have also pointed to an improvement. Risk perceptions have been highly volatile over the past few months. For this reason, the Monetary Council continues to consider it important that an agreement between the Government, the EU and the IMF is reached as soon as possible, in order to reduce the risks associated with financing the government debt.

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 financial markets over the recent period continues to warrant a cautious policy stance.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 14 March 2012.

Monetary Council