26 November 2013

At its meeting on 26 November 2013, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 20 basis points from 3.40% to 3.20%, with effect from 27 November 2013.

In the Council’s judgement, the expansion of the Hungarian economy is likely to continue this year, followed by a further pick-up in growth next year. While the pace of activity is strengthening, the level of output remains below its potential and high, but falling, unemployment exceeds its long-term level determined by structural factors. The Council expects external economic activity to strengthen gradually and weak domestic demand conditions to persist. As a result, inflationary pressures in the economy are likely to remain subdued in the medium term.

Inflation continued to fall in October, mainly reflecting developments in food and administered prices, in addition to the decline in fuel prices. The Bank’s measures of underlying inflation capturing medium-term developments in inflation remained broadly unchanged relative to previous months. The low rate of underlying inflation since the beginning of the year reflects the disinflationary impact of weak domestic demand and the external environment. Subdued wage dynamics suggest that companies are adjusting to higher production costs mainly through the labour market, and therefore the pass-through into consumer prices is likely to be limited and gradual. The low inflation environment may help anchor inflation expectations. In the Council’s judgement, therefore, inflationary pressures are likely to remain moderate over the medium term. In the current environment, monetary policy can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions.

The preliminary estimate of GDP growth for the third quarter suggests a gradual improvement in the outlook for economic growth. Growth is expected to pick up further in the coming quarters, with both exports and domestic demand components likely to be contributing to this. The improvement in domestic demand is likely to be gradual, reflecting ongoing deleveraging and the cautious behaviour of households. Export growth is likely to continue in line with the expansion in external demand, which is expected to pick up markedly starting from the end of this year.

Overall, the global financial environment has been volatile recently, due to uncertainty about the future of non-conventional measures used by global central banks. There has been a slight deterioration in perceptions of the risks associated with the Hungarian economy, simultaneously with a new wave of capital outflows from emerging markets. In the Council’s judgement, the global financial environment remains supportive overall, but volatile sentiment in global financial markets continues to pose a risk, which in turn calls for maintaining a cautious approach to policy.

In the Council’s judgement, there remains a significant degree of unused capacity in the economy and inflationary pressures are likely to remain moderate over a sustained period. A further reduction in interest rates is consistent with meeting the 3% inflation target in the medium term. Global financial markets continue to be volatile. A sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy. In the Council’s view, considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy, further cautious easing of policy may follow.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 4 December 2013.

Monetary Council