27 May 2014

At its meeting on 27 May, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 10 basis points from 2.50% to 2.40%, with effect from 28 May 2014.

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 likely to approach that level in the course of next year. With employment rising, the unemployment rate is falling, but still exceeds its long-term level determined by structural factors. Inflationary pressures are likely to remain moderate over the medium term.

Inflation continued to fall in April. The Bank’s measures of underlying inflation capturing the medium-term outlook still indicate moderate inflationary pressures in the economy, reflecting 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. Domestic real economic and labour market factors continue to have a disinflationary impact, but demand-side disinflationary pressures are weakening as activity gathers pace.

Data available since the Council’s latest interest rate decision show that economic growth continued, as reflected in the 2014 Q1 preliminary GDP release as well as monthly data on industrial output, retail sales and the performance of construction. Growth is expected to pick up gradually in the quarters ahead and to return to a more balanced structure, with domestic demand likely to make an increasing contribution. Along with the Government’s infrastructure projects using EU funding and rising corporate investment due to the Funding for Growth Scheme, the recovery in household consumption is likely to be gradual. The expansion in real incomes is expected to be partly offset by the ongoing reduction in debts accumulated in the years prior to the crisis and the slow easing in tight credit conditions. According to labour market data for March, demand for labour increased and unemployment fell, which may point to a tighter labour market going forward.

Global investor sentiment has been supportive in the past month, but future developments are surrounded by uncertainty due to the ongoing conflict between Ukraine and Russia. Domestic risk premia on balance fell and the forint exchange rate appreciated steadily in the past month. Hungary’s persistently high external financing capacity and the resulting decline in external debt are reducing its vulnerability. The announcement by the MNB about its programme of self-financing may have also contributed to the improvement in perceptions of the risks associated with the economy. In the Council’s judgement, a cautious approach to policy is warranted due to uncertainty 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 for an extended period. The negative output gap is expected to close gradually at the policy horizon; however, achieving price stability in the medium term points in the direction of monetary easing. The improvement in perceptions of the risks associated with the economy provided scope for a further cautious reduction in interest rates. The Monetary Council will decide on the need and possibility of reducing the base rate further after a comprehensive assessment of the macroeconomic outlook and developments in perceptions of the risks about the economy and in view of the baseline projection and alternative scenarios in the June issue of the Quarterly Report on Inflation.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 June 2014.

Monetary Council