23 April 2013

At its meeting on 23 April 2013, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 25 basis points from 5.00% to 4.75%, with effect from 24 April 2013.

In the Council’s judgement, Hungarian economic growth is likely to resume this year following last year’s recession. The level of output remains below its potential and unemployment above its long-term level determined by structural factors. The Council expects weak demand conditions to persist, which will ensure that inflationary pressures in the economy remain muted in the period ahead.

Recent inflation data have confirmed that weak domestic demand exerts strong downward pressure on prices. Inflation fell back to below the Bank’s target, reflecting the effects of the reduction in administered prices at the beginning of the year and subdued demand. The upward impact on costs of fiscal measures, leading to a higher tax burden on certain sectors of the economy, may feed through gradually to the entire corporate sector along the production chain, which in turn may lead to higher core inflation adjusted for indirect taxes. However, the Council judges that, with the output gap remaining negative, the passing on of increased costs into consumer prices may be slow and partial. Inflation is likely to remain below the 3 per cent target throughout this year and settle close to the target value in 2014.

External and domestic factors both contributed to weak activity data towards the end of last year, while temporary cuts in production in some sectors of the economy for idiosyncratic reasons exacerbated the downturn. Growth is expected to resume this year as the country’s export markets improve, but external and, to a greater extent, domestic demand factors point to only modest growth in the period ahead. In the low inflation environment, household real income growth is expected to recover. However, due to the protracted deleveraging process and increased uncertainty about the economic environment, household consumption behaviour is likely to be cautious and the saving rate to be high, and therefore consumer demand is likely to strengthen only from 2014.

Global risk appetite has remained high over the past month. Risk premia on Hungarian financial assets fell significantly, reflecting an improvement in the international environment. In the Council’s judgement, however, the contrast between the benign financial market environment and weak real economic activity still remains despite intensified efforts by the international community, which warrants a cautious approach to policy.

In the Council’s judgement, the economic data becoming available in the past month suggest that weak demand continues to exert a strong disinflationary impact on prices, and therefore companies have limited ability to pass on higher production costs into prices. Based on this assessment, the outlook for inflation and the real economy is consistent with a lower central bank base rate. The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains in line with the Bank’s 3 per cent target and the improvement in financial market sentiment is sustained.

The abridged minutes of today’s Council meeting will be published at 2 pm on 15 May 2013.

Monetary Council