18 February 2014

At its meeting on 18 February, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 15 basis points from 2.85% to 2.7%, with effect from 19 February 2014.

In the Council’s judgement, Hungarian economic growth is likely to continue this year and next. While the pace of economic activity is strengthening, output remains below its potential and is likely to come close to that level again at the end of the horizon relevant for monetary policy. With employment rising, the unemployment rate is falling, but still exceeds its long-term level determined by structural factors. Inflationary pressures in the economy are likely to remain subdued over the medium term. Global investor sentiment has been volatile recently, and perceptions of the risks associated with Hungary and other economies of the region have deteriorated.

Inflation continued to fall in January, mainly as a result of the moderation in fuel prices. The Bank’s measures of underlying inflation capturing the medium-term outlook rose relative to the previous month but continued to indicate moderate inflationary pressures in the economy, which reflects the effects of weak domestic demand and low inflation in external markets. The persistently low inflation environment may provide a firmer anchor for inflation expectations. The rate of private sector wage growth has picked up somewhat recently but still remains moderate. Domestic real economic factors are expected to continue to have a disinflationary impact, although to a declining extent, as activity rises further.

Incoming data showed that economic growth continued in the fourth quarter of 2013. According to the preliminary release, GDP growth in the fourth quarter of 2013 was stronger than market expectations. Growth is expected to pick up further in the quarters ahead and to return to a more balanced pattern. With the increase in corporate investment due to the Funding for Growth Scheme and the Government’s infrastructure projects using EU funding, the recovery in household consumption is likely to be gradual. Growth in real income is expected to be partly offset by the ongoing reduction in debt accumulated during the years prior to the crisis and the slow easing in tight credit conditions.

Global investor sentiment has been volatile recently as a result of the Fed’s decision to reduce further the pace of its asset purchases and the deterioration in perceptions of the risks associated with emerging economies. A number of emerging market currencies came under heavy selling pressure. Looking forward, however, the euro-area policy rate is expected to remain at low levels for an extended period. Perceptions of the risks associated with Hungary and other economies of the region deteriorated, as reflected in rises in CDS spreads and bond yields and higher volatility of the forint exchange rate. In the Council’s judgement, a cautious approach to policy is warranted due to uncertainty related to the global financial environment.

Nevertheless, Hungary’s position is fundamentally strong compared to other emerging market economies. The country’s persistently high external financing capacity and the resulting decline in external debt are reducing its vulnerability. The current account has moved into surplus, reflecting the significant adjustment by the government and private sectors, thereby reducing the country’s external debt and the economy’s reliance on external financing.

In the Council’s judgement, there remains a significant degree of unused capacity in the economy and inflationary pressures are likely to remain moderate for an extended period. Delivering price stability in the medium term points in the direction of monetary easing. Conditions in global financial markets have been volatile recently. In the Council’s judgement, there remained scope for reducing interest rates in the context of increased uncertainty in financial markets. The room for manoeuvre in monetary policy - taking into account financial stability considerations - continues to be influenced by the medium-term achievement of the inflation target, a corresponding degree of support to the economy and a sustained and marked shift in perceptions of the risks associated with the Hungarian economy. The Monetary Council will decide on the need and possibility for continuing the easing cycle after a comprehensive assessment of the macroeconomic outlook and developments in perceptions of the risks about the economy in view of the baseline projection and alternative scenarios of the March forecast.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 March 2014.

Monetary Council