29 April 2014
At its meeting on 29 April, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 10 basis points from 2.60% to 2.50%, with effect from 30 April 2014.
In the Council’s judgement, Hungarian economic growth is likely to continue. However, while the pace of economic activity is strengthening, output remains below its potential and is likely to return close to that level during next year. 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 moderate over the medium term and inflation is likely to move into line with the medium-term inflation target from 2015.
Inflation was unchanged in March relative to the previous month, remaining at 0.1 per cent. The Bank’s measures of underlying inflation capturing the medium-term outlook remained broadly unchanged and 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 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 last interest rate decision show that economic growth continued, as reflected in 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 pattern, with domestic demand likely to make an increasing contribution. With the increase in the Government’s infrastructure projects using EU funding and in corporate investment due to the Funding for Growth Scheme, the recovery in household consumption is likely to be gradual. Growth in real incomes is expected to be partly offset by the ongoing reduction in debts accumulated during 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, pointing to a tighter labour market looking ahead.
Global investor sentiment was volatile in the past month. Market tensions intensified as a result of the escalation of the conflict between Ukraine and Russia. Domestic risk premia fell slightly and the forint exchange rate strengthened, showing lower volatility than in the previous month. The country’s persistently high external financing capacity and the resulting decline in external debt are reducing its 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 degree of unused capacity in the economy and inflationary pressures are likely to remain moderate over the medium term. The negative output gap is expected to close gradually at the policy horizon; therefore, the disinflationary impact of the real economy is likely to decrease looking forward and inflation is likely to move in line with the target in the medium term. The slight improvement in perceptions of the risks associated with the economy has provided room for a cautious reduction in interest rates.
As the Monetary Council indicated in its March press release, the central bank base rate has significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the real economy. Over the coming period, changes in the domestic and international environment might influence this picture.
The Monetary Council always considers carefully the macroeconomic outlook and developments in perceptions of the risks associated with the economy before deciding on the direction and magnitude of the next change in the policy rate.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 14 May 2014.
MAGYAR NEMZETI BANK