21 January 2014

At its meeting on 21 January 2014, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 15 basis points from 3.00% to 2.85%, with effect from 22 January 2014.

In the Council’s judgement, Hungarian economic growth is likely to continue this year and next. While the pace of activity is strengthening, the level of output remains below its potential and is likely to return close to that level at the end of the horizon relevant for monetary policy. With employment rising steadily, 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.

Inflation continued to fall in December, mainly as a result of the reduction in regulated energy prices in November. In addition to the temporary factors reducing inflation, the Bank’s measures of underlying inflation capturing the medium-term outlook also 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 facilitate the adjustment of inflation expectations. The rate of private sector wage growth has picked up slightly 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, as reflected by monthly data on industrial production, the trade surplus, construction output and retail trade turnover. Economic growth is expected to continue in the quarters ahead, and is likely to be more balanced than previously. Domestic demand is expected to grow over the next years, in addition to rising exports. 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 remained supportive, despite the Fed’s decision to reduce the pace of its asset purchases at the end of last year. Perceptions of the risks associated with the Hungarian economy improved, as reflected in the declines in CDS spreads and bond yields. Hungary’s persistently high external financing capacity and the resulting decline in external debt act to reduce the country’s vulnerability. In the Council’s judgement, a cautious approach to policy is warranted due to uncertainty related to the global financial environment.

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. Delivering price stability in the medium term points in the direction of monetary easing. The global financial environment remained supportive. A sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy. Considering the outlook for inflation and taking into account perceptions of the risks associated with the economy as well as the improvement in the pace of economic growth, further cautious easing of monetary policy may follow, but a reduction in the increment has become warranted.

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

Monetary Council