28 May 2013

At its meeting on 28 May 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 4.75% to 4.50%, with effect from 29 May 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.

Inflation slowed sharply in April, partly related to developments in the prices of non-core items. Recent trends in underlying inflation continue to reflect the strong downward pressure of weak domestic demand on prices. The subdued rate of earnings growth suggests that companies are adjusting through the labour market more strongly in response to the increase in production costs, and therefore the pass-through into consumer prices is likely to be moderate. Recent developments in energy and commodity prices as well as the forint exchange rate have also contributed to the disinflation process. In the Council’s judgement, these factors indicate that inflation risks will remain moderate in the medium term.

Preliminary data suggest that the Hungarian economy may recover from recession in the first half of 2013. The correction of adverse one-off shocks at the end of last year may also have contributed significantly to the strong quarter-on-quarter growth. 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. Risk appetite in global financial markets has remained strong in the past month. In the supportive environment, domestic indicators of risk continued to fall. The Council judges, however, that the contrast between the benign financial market environment and the weak outlook for global growth continues to pose a risk, which calls for maintaining a cautious approach to policy.

In the Council’s judgement, the incoming economic data 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, while they are making stronger adjustment through the labour market. Perceptions of the risks associated with the economy have improved. The outlook for inflation and the real economy point to a reduction in interest rates. 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 p.m. on 12 June 2013.

Monetary Council