26 February 2013

At its meeting on 26 February 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 5.50% to 5.25%, with effect from 27 February 2013.

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

Inflation in January slowed more than anticipated. The decline was related to a wide range of goods and services. This, coupled with the marked slowdown in underlying inflation, may reflect the stronger-than-expected disinflationary impact of weak domestic demand. The short-term outlook for inflation improved significantly as a result of the lower-than-projected price increases around the start of the year and the government measures affecting the prices of items excluded from the core measure. However, the extent to which companies will be able to pass on higher production costs into prices in response to the government measures may be a source of uncertainty for the medium-term inflation outlook. The Monetary Council will therefore continue to monitor closely developments in underlying inflation.

According to preliminary data, in the final quarter of last year the performance of the Hungarian economy fell by more than expected. Growth is likely to resume this year following last year’s recession as the country’s export markets recover; however, external, and domestic demand factors in particular, point to only modest growth in the period ahead. In the Monetary Council’s judgement, there remains a degree of spare capacity in the economy, output continues to be significantly below its potential level and the labour market remains loose. The weakness in investment and persistently high unemployment suggest that the potential growth rate of the economy is significantly below its pre-crisis level.

Global risk appetite has remained strong over the past month, but the contrast between improved investor sentiment in international financial markets and the modest outlook for growth in the world economy continues to pose a risk. Meanwhile, domestic risk premia have remained broadly stable. The success of the foreign currency-denominated bond issue by the Government has reduced financing risks for the economy. Cooperation with the European Commission and the International Monetary Fund might contribute to a further reduction in financing costs and a sustained improvement in perceptions of the risks associated with the economy.

In the Monetary 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 will have limited ability to pass on higher production costs into prices. The favourable global financial market environment may lead to a sustained fall in domestic financial asset prices. In the light of these factors, the inflation target can be met even with looser monetary conditions. The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains consistent with the Bank’s 3% target and the improvement in financial market sentiment is sustained.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 March 2013.


Monetary Council