21 July 2015

At its meeting on 21 July 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 1.50% to 1.35%, with effect from 22 July 2015.

In the Council’s assessment, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, output remains below potential and the domestic real economic environment is expected to continue to have a disinflationary impact, albeit to a diminishing extent. Despite the pick-up in domestic demand, capacity utilisation is expected to improve only gradually due to the protracted recovery in Hungary’s export markets. With employment rising, unemployment continues to exceed its long-term level determined by structural factors. Inflationary pressures are likely to remain moderate for an extended period.

Consumer prices continued to show low dynamics in June, rising slightly compared with both the previous month and the same period a year earlier. The inflation data received was consistent with both the projection in the June Inflation Report and market expectations. Core inflation was unchanged relative to May. 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, the low level of imported inflation and the degree of unused capacity in the economy. Core inflation is likely to rise gradually as the effects of the low-cost environment fade, domestic demand picks up and wages increase. Domestic real economic and labour market factors continue to have a disinflationary impact and the low inflation environment is likely to persist. Consequently, inflation is expected toapproach levels around the 3 per cent target only towards the end of the forecast horizon, reflecting moderate underlying inflation.

In the Council’s assessment, Hungarian economic growth is likely to continue at a rapid pace. Robust growth has been supported by both domestic and external demand. On the expenditure side, domestic demand growth may have continued. In May, the trade surplus was significantly higher than its level a year previously. The dynamics of retail sales have been stable in recent months, with the volume of sales increasing across a wide range of products. Based on data for May, industrial production expanded somewhat less dynamically relative to the same period a year earlier than in previous months. Rising household real income underpinned by low inflation, the reduced need for deleveraging and growing 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. Unemployment fell in May as the activity rate remained unchanged.

Overall, international investor sentiment has been unfavourable in the period since the Council’s latest policy decision. The various indicators of risk rose and the major equity indices fell. Tensions surrounding the financing of Greek government debt and the country’s potential exit from the euro area as well as concerns about the disturbances in Chinese capital markets had a negative impact on global investor sentiment in the first part of the period. However, in the latter half of the period, global appetite for risk improved. Accompanied by noticeable fluctuations, the forint depreciated against the euro, driven by international factors, before appreciating considerably as investor sentiment improved. The domestic CDS spread has remained broadly unchanged and long-term government bond yields have fallen since the previous policy decision. Persistently high external financing capacity of the Hungarian economy and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s assessment, a cautious approach to monetary policy is warranted due to uncertainty in the global financial environment.

In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate. 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 available data, the risk of second-round effects materialising due to excessively low inflation expectations has moderated. In the Council’s assessment, the policy rate has reached the level which ensures the medium-term achievement of the inflation target and a corresponding degree of support to the economy. If the assumptions underlying the Bank’s projections hold, the inflation outlook and the cyclical position of the economy point to the direction of loose monetary conditions for an extended period.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 August 2015.

Monetary Council