26 August 2014
At its meeting on 26 August 2014, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 2.10%.
In the Council’s judgement, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, output remains below potential and is only likely to approach that level in the course of next year. Despite the pick-up in the components of domestic demand, capacity utilisation is expected to improve only gradually due to the protracted recovery in Hungary’s export markets. With employment rising, the unemployment rate has been broadly flat since the start of the year, but still exceeds its long-term level determined by structural factors. Inflationary pressures in the economy are likely to remain moderate for an extended period.
Based on the inflation data for July, consumer prices continue to show historically low dynamics. The Bank’s measures of underlying inflation capturing the medium-term outlook still indicate moderate inflationary pressures in the economy, reflecting low inflation in external markets, the degree of unused capacity in the economy, subdued wage dynamics, the fall in inflation expectations and the reductions in administered prices, implemented in a series of steps. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. However, domestic demand-side disinflationary pressures are weakening gradually as activity gathers pace, and inflation is likely to reach levels around 3 per cent consistent with price stability by the end of the forecast horizon.
Based on data available since the previous interest rate decision, economic growth continued, in line with the June projection, as reflected in data for industrial production and retail trade. In the Council’s judgement, the Hungarian economy returned to a growth path in 2013. Looking ahead, economic growth may continue in a more balanced pattern than previously, with the recovery in domestic demand likely to make a greater contribution. The increasing use of EU funding and the easing in credit constraints also due to the Bank’s Funding for Growth Scheme are expected to sustain the recovery in investment. Household consumption is also likely to grow gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging. However, propensity to save is expected to remain above levels seen prior to the crisis. Based on labour market data for June, the number of employees continued to rise and the unemployment rate was unchanged.
International investor sentiment deteriorated somewhat in the past month, mainly reflecting the escalation of geopolitical conflicts and revised expectations of an interest rate increase by the US Federal Reserve. Hungarian risk premia remained broadly unchanged in the period and the forint exchange rate depreciated, mostly along with other currencies of the region. Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. The Bank’s self-financing programme may contribute to an improvement in perceptions of the risks associated with the economy. In the Council’s judgement, a cautious approach to policy is still warranted due to uncertainty about future developments in the global financial environment.
In the Council’s judgement, there remains a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate in the medium term. The negative output gap is expected to close gradually at the monetary policy horizon. Looking ahead, therefore, the disinflationary impact of the real economy is likely to diminish and, with current monetary conditions maintained, inflation is likely to move into line with the target over the medium term. The Council judges that, based on available information the current level of the central bank base rate is consistent with the medium-term achievement of price stability and a corresponding degree of support for the economy. If the assumptions underlying the Bank’s projection hold, achieving the medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 September 2014.
Magyar Nemzeti Bank