22 June 2009
At its meeting on 22 June 2009, the Monetary Council reviewed the latest economic and financial developments and voted to maintain the central bank base rate at 9.50%.
The Monetary Council continues to judge that the Hungarian economy is undergoing a severe downturn this year. Inflation is likely to rise sharply over the short term due to the indirect tax increases; however, it may be close to target on the horizon relevant for monetary policy.
Data released over the past month show that value added fell across all goods producing sectors in 2009 Q1. The weakness of industries producing for the domestic market also played a role in the decline in output, in addition to the deterioration in the performance of the export sector. Households have cut back their spending recently, in response to the further tightening in credit conditions and the adjustment in wages and employment in the labour market, which, in turn, has contributed to a reduction in the country’s external financing requirement. Nevertheless, the Hungarian economy continues to face difficult external demand conditions. Although business confidence indices in the country’s export markets show some signs of improvement, economic activity in Europe is unlikely to recover rapidly. Given this outlook, the Hungarian economy is only expected to recover convincingly in 2011.
Over the past two months, inflation has remained above the 3% inflation target, mainly reflecting one-off factors, and it is expected to increase substantially further from the second half of the year, due to the change in indirect taxes. The weaker exchange rate compared with the average of previous years has not yet passed through fully into domestic prices; however, the decline in demand may mitigate the possible future effects of depreciation. Overall, inflation may settle below the target over the horizon relevant for monetary policy, due to the prolonged weakness of domestic demand.
The increase in investors’ appetite for risk around the world and the improvement in sentiment towards the economies of Central and Eastern Europe in the spring have been largely sustained over the past month. However, Hungary’s dependence on foreign funding and the ongoing strains in domestic financial markets call for caution in the conduct of monetary policy.
The Monetary Council took its decision to leave interest rates unchanged after considering the outlook for the real economy and inflation as well as the latest financial market developments. The central bank base rate may be reduced, if the recent improvement in risk sentiment is sustained.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 17 July 2009, in line with the release schedule announced earlier. However, the release schedule for the minutes of the Monetary Council’s rate-setting meetings will change from August 2009. From that date the minutes will be published two working days earlier, on the third working day of the week. The modified publication dates for 2009 Q2 can be downloaded from the Council’s meeting calendar.
MAGYAR NEMZETI BANK
Monetary Council