23 July 2013

At its meeting on 23 July 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 4.25% to 4.00%, with effect from 24 July 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 exceeds 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.

In the Council’s judgement, the rate of price increases affecting the general consumer price level, caused by the regulatory price measures taken to ensure the co-movement of producer and consumer prices between 2002 and 2009, fell to around half after 2010. This indicates a change in the approach of economic policy to inflation. Consequently, inflation in 2013 is expected to fall back to around 3 per cent even excluding the effect of the reduction in utilities prices.

Inflation remained low in June. Historically low inflation is partly related to developments in the prices of non-core items. In addition, measures of underlying inflation have fallen further and have been at low levels since the beginning of the year, reflecting the strong downward pressure of weak domestic demand on prices. The low rate of earnings growth suggests that companies are adjusting to higher production costs mainly through labour costs, and therefore the pass-through into consumer prices is likely to be moderate. In the Council’s judgement, these factors indicate that underlying inflation remains subdued and risks to inflation will be moderate over the medium term.

The Hungarian economy is likely to recover from recession in 2013. The main underlying factors driving growth have not changed significantly: the outlook for global growth remains weak, while precautionary motives continue to be a drag on the recovery in domestic demand. A sustained pick-up in growth is likely to occur from the end of the year as demand in Hungary’s export markets improves. The external balance of the economy remains favourable.

In the Council’s view, risk appetite in global financial markets has been highly volatile over the past month. Domestic indicators of risk declined despite increased uncertainty in the global financial environment, and no significant sell-off of domestic assets occurred. In the Monetary Council’s assessment, increased volatility in sentiment in global financial markets and the uncertain outlook for global economic growth continue to pose a risk, which in turn calls for maintaining a cautious approach to policy.

In the Council’s judgement, there is a significant degree of spare capacity in the Hungarian economy and inflationary pressures are likely to remain moderate even over the medium term. Data becoming available over the past month confirm that weak demand has exerted a strong disinflationary impact, and therefore companies have limited ability to pass on higher production costs into prices. Consequently, easier monetary policy will ensure that the 3 per cent inflation target is achieved. However, global financial markets have been volatile recently. A sustained and marked shift in perceptions of the risks associated with the economy may influence the room for manoeuvre in monetary policy. The significant reductions in interest rates so far and the volatile conditions in financial markets may justify changing the pace or extent of policy easing over the coming months.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 August 2013.

Monetary Council