21 April 2015

At its meeting on 21 April 2015, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 15 basis points from 1.95% to 1.80%, with effect from 22 April 2015.

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 the domestic real economy is expected to continue to have a disinflationary impact, albeit to a diminishing extent. 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 continues to exceed its long-term level determined by structural factors. Inflationary pressures are likely to remain moderate for an extended period.

Based on the inflation data for March, consumer prices show historically low dynamics; however, the rate of decline in prices slowed. The March inflation data was consistent with the projection in the March issue of the Inflation Report, but was slightly higher than market expectations. The Bank’s measures of underlying inflation capturing the short-term outlook still indicate moderate inflationary pressures in the economy, reflecting persistently low inflation in external markets, subdued imported inflation, the degree of unused capacity in the economy and the moderation in inflation expectations. The rise in fuel prices was the main factor influencing inflation developments, while core inflation was broadly unchanged relative to the previous month. With the pick-up in domestic demand and owing to the increase in wages, core inflation is likely to rise gradually; however, this process may slow due to the second-round effects of low commodity prices. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. Overall, more moderate underlying inflation developments point in the direction of a low inflation environment, and therefore inflation is expected to approach levels around 3 per cent towards the end of the forecast period.

In the Council’s judgement, Hungarian economic growth is likely to continue at a rapid pace. Robust growth has been supported by both domestic and external demand. The volume of industrial production grew further, but fell relative to the previous month. The trade surplus was stable. The dynamics of retail sales have been stable and increased slightly in recent months, with the volume of sales increasing across a wide range of products. Rising household real income as a result of low inflation, the reduced need for deleveraging and increasing employment are expected to contribute to the increase in household consumption. Investment is expected to pick up gradually, owing to the recovery in activity, the Funding for Growth Scheme and its extension. Employment was broadly unchanged in February.

On the whole, international investor sentiment has been favourable in the period since the Council’s latest interest rate decision. Increased uncertainty surrounding Greece, mixed incoming macroeconomic data from the US, the conflict between Ukraine and Russia and geopolitical tensions in the Middle East adversely affected international investor sentiment, while positive macroeconomic news from the euro area contributed to an improvement in financial markets. With small fluctuations, the forint appreciated against the euro, followed by a slight correction at the end of period. Domestic risk measures and long-term government bond yields rose slightly in the period since the latest policy decision. Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s judgement, a cautious approach to monetary policy is warranted due to uncertainty in the global financial environment.

In the Council’s judgement, there is a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate for a sustained period. The real economy is likely to have a disinflationary impact at the policy horizon and the negative output gap is expected to close only gradually.

Based on data becoming available previously, the risk of second-round effects taking hold in the wake of the change in inflation expectations still remains after increasing in recent months. In the Council’s judgement, if the assumptions underlying the Bank’s projections hold, the inflation outlook and the cyclical position of the economy point in the direction of a reduction in the policy rate and loose monetary conditions for an extended period. Cautious easing of the policy rate may continue as long as it supports the achievement of the medium-term inflation target.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 May 2015.

Magyar Nemzeti Bank
Monetary Council