24 February 2015

At its meeting on 24 February 2015, 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 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 rate 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 January, consumer prices 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 persistently low inflation in external markets, the moderate path of commodity prices and imported inflation, the degree of unused capacity in the economy and the moderation in inflation expectations. The continued decline in oil prices and the fall in market services prices have contributed to the further easing in inflation and core inflation, respectively. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. Based on the low market services price index, the probability of second-round effects may have increased. However, domestic demand-side disinflationary pressures are likely to weaken significantly in the second half of the forecast period as activity gathers pace, and inflation is likely to reach levels around 3 per cent consistent with price stability in the latter half of the forecast period, accompanied by an increase in downside risks.

In the Council’s judgement, economic growth is likely to continue even as external demand has weakened slightly. According to the preliminary data release, Hungary’s gross domestic product grew in the fourth quarter of 2014 relative to both the same period a year earlier and the previous quarter. Industrial production fell relative to the previous quarter, while the trade surplus remained 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. Looking ahead, domestic demand is likely to be the main engine of growth. The extended Funding for Growth Scheme is likely to promote corporate investment this year, but weak global economic activity and lower receipts of EU funding are likely to work in the opposite direction. Household consumption is also likely to pick up gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging. According to seasonally adjusted data, employment was broadly unchanged in the fourth quarter of 2014 relative to the previous period, with the increase in the number of those employed under public employment programmes also playing a role.

International investor sentiment has been volatile since the Council’s latest interest rate decision. The political events in Greece and the escalation of the conflict between Ukraine and Russia had a negative impact on global sentiment. But the correction in the path of world oil prices since January and the announcement on the extension of the European Central Bank’s asset purchase programme at the end of January, and then the results of the negotiations to settle the conflict between Ukraine and Russia resulted in an improvement in financial market sentiment. The forint appreciated against the euro, mainly reflecting international factors. Developments in domestic risk measures were mixed, with the CDS spread falling significantly since the latest policy decision and long-term government bond yields rising slightly. 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 view, a cautious approach to monetary policy is 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. Based on data available since the latest policy decision, there has been a further shift towards the alternative scenario implying looser monetary policy published in the December 2014 Inflation Report, and the probability of second-round effects taking hold in the wake of disinflationary trends in the economy as well as a change in inflation expectations has increased. However, the Council judges that, based on available information, the current level of the central bank base rate yet remains consistent with the medium-term achievement of price stability and a corresponding degree of support to the real economy. If the assumptions underlying the Bank’s projections hold, achieving the inflation target points in the direction of loose monetary conditions for an extended period. The Monetary Council will consider the need for possible further easing of monetary conditions in view of the March Inflation Report projection, after a comprehensive assessment of the medium-term outlook for inflation.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 March 2015.

Magyar Nemzeti Bank
Monetary Council