The MNB has today published the March 2012 issue of its Quarterly Report on Inflation. The projection is for inflation to be significantly above the Bank’s inflation target this year due to cost shocks and increases in indirect taxes. The consumer price index may fall back to 3% by early 2013 as the direct inflationary effects of the indirect tax increases subside. The outlook for domestic growth continues to be shaped by a combination of slowing global growth and persistently weak domestic demand. The Hungarian economy is expected to stagnate this year and to recover gradually in 2013.

In the current projection, the consumer price index rises significantly this year to levels between 5% and 6%, reflecting high and rising commodity prices and the increases in taxes. In 2013, however, the disinflationary impact of weak domestic demand is likely to be a key determinant of consumer prices as the effects of the indirect tax increases wane and commodity prices stabilise. The consumer price index is projected to fall quickly to meet the inflation target in early 2013.

Balance sheet adjustment by economic agents both at home and in Europe is expected to continue, which points to a subdued outlook for domestic growth on the forecast horizon. The Hungarian economy is likely to slow to near stagnation in 2012; and GDP growth is expected to be muted in 2013.

Labour market activity is likely to increase as a result of the Government’s measures. However, demand for labour is projected to be unchanged and the labour market to remain loose over the entire forecast period, due to the weaker outlook for growth.

The government budget made a positive contribution to aggregate demand growth in 2011; however, a contraction in demand equivalent to 3% of GDP will be needed in the coming two years to meet the Government’s fiscal deficit targets.

There are considerable uncertainties surrounding the projection published in the Report, mainly related to future changes in perceptions about the Hungarian economy and commodity prices.

The Report is available via the following link: