26 May 2015

At its meeting on 26 May 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 1.80% to 1.65%, with effect from 27 May 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, 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 April, consumer prices show historically low dynamics; however, the rate of decline in prices slowed further. The April inflation data was slightly higher than both the projection in the March issue of the Inflation Report and market expectations; however, 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. Rises in fuel prices as well as in the price indices for market services and unprocessed food were the main factors contributing to the increase in inflation. Core inflation was up slightly compared 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, moderate underlying inflation developments continue to 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. This is underpinned by the preliminary GDP data for the first quarter of 2015, which showed that the Hungarian economy continued to grow dynamically, mainly driven by the performance of industry and the expansion in retail sales. On the expenditure side, domestic demand growth may have continued. According to preliminary data, the trade surplus was higher in March than a year previously. 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 grew further in the first quarter as activity picked up.

International investor sentiment has been mostly unfavourable in the period since the Council’s latest interest rate decision. The downgrade of Greek government debt as well as tensions surrounding its financing and weak incoming macroeconomic data from the US negatively affected international investor sentiment. In addition, the reduction in risks associated with deflation in the euro-area economy may also have contributed to rises in long-term yields in developed and emerging markets. Accompanied by noticeable fluctuations, the forint depreciated against the euro, mainly driven by international factors. The domestic CDS spread has remained broadly unchanged, while long-term government bond yields have risen in line with rising euro area yields 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 10 June 2015.

Magyar Nemzeti Bank
Monetary Council