27 August 2013

At its meeting on 27 August 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 4.00% to 3.80%, with effect from 28 August 2013.

In the Council’s judgement, Hungarian economic growth is likely to recover gradually this year; however, 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 ensures that inflationary pressures in the economy remain muted in the medium term.

Data for July indicate that inflation remained at historically low levels. Although temporary factors have also contributed to the decline in inflation, the persistently low rate of underlying inflation measures reflects the strong downward pressure of weak domestic demand on prices. Low wage dynamics suggest that companies are adjusting to higher production costs mainly through labour costs, rather than through consumer prices, and therefore, the pass-through into consumer prices is likely to be moderate. In the Council’s judgement, these factors indicate that there is no significant inflationary pressure in the Hungarian economy and that risks to inflation could remain moderate over the medium term, which in turn will help anchor inflation expectations. In the current environment, monetary policy can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions.

The Hungarian economy has recovered from recession this year. The improvement in domestic demand is likely to be slow and gradual, due to ongoing deleveraging and cautious behaviour by households, while activity in external markets, mainly in developed economies, is showing signs of a revival. However, there is uncertainty about future developments in external demand, caused by the slowdown in growth in emerging regions of the world. A sustained pick-up in growth is likely to occur from the end of the year as demand in Hungary’s export markets improves.

Perceptions of the risks associated with the Hungarian economy have increased slightly in the uncertain global financial environment. In the Monetary Council’s assessment, higher volatility in 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, the Hungarian economy is characterised by significant unused capacity, and inflationary pressures are likely to remain moderate over the medium term. Incoming data continue to suggest that weak demand has exerted a strong disinflationary impact, and, as a result, companies have limited ability to pass on higher production costs into prices. Consequently, a more accommodative monetary policy stance would ensure that the 3% inflation target is achieved over the medium term. After some temporary stabilisation, global financial markets have become more volatile again. 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 judgement, incoming data on inflation and the real economy give scope to ease monetary conditions further. However, in light of the significant reduction in interest rates so far and taking into account developments in perceptions of the risks associated with the Hungarian economy, a slower pace of policy easing is warranted.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 September 2013.

Monetary Council