The MNB left its projection for 2016 GDP growth unchanged at 2.5%. The full Inflation Report will be published tomorrow. The Monetary Council of the MNB expects inflation to be significantly below the inflation target over the short term.
According to the bank: The underlying trends were overall in line with the projection in the June issue of the report, the difference between the projection and the actual outcome for inflation was mainly caused by lower fuel prices. Inflation is likely to accelerate towards the end of 2015. Core inflation should pick up gradually as costs increase and as a result of an expansion in domestic demand and increases in wages. The inflation target is expected to be achieved by around two quarters later relative to the previous projection. Inflation is expected to rise to around 3% only in H2 2017. Domestic demand is likely to make an increasing contribution to economic growth. Rising exports, improvement in the labor market, low inflation environment and the conversion of FX loans also supports growth. However a slowdown is expected in early 2016 as EU transfers decline.
The Monetary Council said considered two alternative scenarios for its baseline projection: In the first scenario persistently low cost environment and strengthening second-round effects pose an upside risk on economic growth and a downside risk on inflation. In this case the inflation target can be achieved with looser monetary conditions than assumed in the baseline projection. In the second scenario, financial market turbulence leads to a sudden, sharp increase in the risk premium and a decline in external demand. Here tighter monetary policy than assumed in the baseline projection would ensures the achievement of the inflation target.
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