27 February 2006
1. At its meeting on 27 February 2006, the Monetary Council considered the latest economic and monetary developments and left the central bank base rate unchanged at 6.00%.
2. The Council’s overall assessment of domestic economic performance has not changed significantly since its previous rate-setting meeting. Based on the most recent economic data, members continue to expect low inflation and favourable business conditions over the medium term. While CPI inflation projected for end-2007 is consistent with the Bank’s medium-term inflation target of 3%, there has been a rise in both the downside and upside risks to inflation, in comparison with November’s projection.
In January 2006, consumer prices rose by 2.7%, a record low rate in the past several decades, due mainly to the reduction in VAT rates. The drop in tradable prices was lower than expected, which may be explained by the fact that the cut in VAT is reflected slowly or only partially in consumer goods prices. At the same time, the reduction in the inflation of market services prices was higher than expected, suggesting that economic agents may have adjusted their inflation expectations to the lower inflation environment.
Labour market developments were significantly more balanced in 2005 than in previous years. As inflation expectations were being adjusted to price stability, wage inflation continued to decline over the year, while the slight increase in labour demand observed side by side with an increase in labour supply exerted no perceptible upward pressure on wages. The Council does not expect the labour market to exert inflationary pressure in the medium term, but will monitor closely any upward risks arising from the rise in minimum wages in 2006.
Despite the favourable inflation and business outlook, the uncertainty surrounding Hungary’s equilibrium path continues to be a cause for concern. Although for the time being exceptionally good global risk appetite offsets the significant domestic macroeconomic risks, the room for manoeuvre of monetary policy may be restricted in the longer term by an increased risk premium required by international investors on forint-denominated assets. The Monetary Council is of the view that fiscal consolidation is currently of key importance for the Hungarian economy. To achieve fiscal discipline it is necessary to implement credible adjustment measures.
3. The Council discussed the revisions made in February 2006 to the projection published in the November 2005 issue of the Bank’s Quarterly Report on Inflation. As announced earlier, the Bank will replace its February and August issues of the Report with a shorter version, presenting the main changes in comparison with the inflation outlook published in the previous Reports.
4. The minutes of the meeting will be published at 2 pm on 10 March 2006.
MAGYAR NEMZETI BANK
Monetary Council