29 October 2013

At its meeting on 29 October 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 3.60% to 3.40%, with effect from 30 October 2013.

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

Data for September suggest that inflationary pressures remain low. Recent movements in the consumer prices index have also reflected temporary effects. 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. 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 moderate. The low inflation environment may help anchor inflation expectations. In the Council’s judgement, therefore, inflationary pressures are likely to remain moderate, close to the target over the medium term as the temporary effects wane. In the current environment, monetary policy can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions.

Economic growth is likely to improve gradually in the coming quarters, supported by both exports and domestic demand components. The improvement in domestic demand is likely to be gradual, reflecting ongoing deleveraging and the cautious behaviour of households. Export growth is expected to continue in line with the rate of growth of external demand, which is expected to pick up markedly starting from the end of this year.

Perceptions of the risks associated with the Hungarian economy have improved over the past month. Uncertainties about the tapering of asset purchases by the Federal Reserve followed by the disagreements over the US federal budget led to volatility in global financial markets. However, these concerns diminished towards the end of the period. In the Council’s judgement, changes in sentiment in global financial markets continue 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. Inflation is expected to remain around the target over the forecast period, which provides scope to ease monetary policy further. Global financial markets have stabilised following a period of increased volatility. 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 monetary conditions may follow.

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

Monetary Council