25 November 2014
At its meeting on 25 November 2014, 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 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 in the economy are likely to remain moderate for an extended period.
Based on the inflation data for October, consumer prices continue to 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, favourable developments in commodity prices and imported inflation, the degree of unused capacity in the economy, subdued wage dynamics, the fall in inflation expectations and the reductions in administered energy prices implemented in a series of steps. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. However, domestic demand-side disinflationary pressures are weakening gradually as activity gathers pace, and inflation is likely to reach levels around 3 per cent consistent with price stability in the second half of the forecast period.
In the Council’s judgement, economic growth is likely to continue even as external demand has weakened slightly. The decline in industrial production in August was partly reversed in September, and the trade surplus rose again, following the decline in the previous month. According to the preliminary data, the dynamics of retail sales were stable in September. In the Council’s judgement, economic growth may continue in a more balanced pattern than previously, with the recovery in domestic demand likely to make a greater contribution to growth. The increasing use of EU funding and the easing in credit constraints also due to the Bank’s Funding for Growth Scheme are expected to sustain the recovery in investment. Household consumption is also likely to grow gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging. However, propensity to save is expected to remain above levels seen prior to the crisis. Employment increased in the third quarter, with a significant contribution from the rise in the number of those employed under public employment programmes.
International investor sentiment has been mostly positive in the past month, mainly reflecting the release of buoyant macroeconomic data in the US, monetary easing by the Bank of Japan and the continued decline in the world market price of crude oil. Domestic risk measures improved 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 judgement, a cautious approach to 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 and, with current monetary conditions maintained, inflation is likely to move into line with the target over the medium term. The Council judges that, based on available information, the current level of the central bank base rate is 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 medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 December 2014.
Magyar Nemzeti Bank
Monetary Council