Rate-setters Point to Impact of Food Prices on Inflation

"Council members agreed that volatile food prices would contribute substantially to the slowing but continued increase in inflation in the coming months," the minutes from the monthly meeting released on Wednesday show.

Several members noted that domestic demand had begun to decline, parallel with a slowdown of the economy since the start of the summer, and, alongside falling global commodity prices, indicated a "turnaround" in domestic inflation. A number of members also said the emerging real interest rate indicates a "moderation in inflation".

Members agreed that Hungary's current-account balance bottomed out in September and was expected to show "gradual improvement". They highlighted that the continuous surplus in non-energy items, together with energy consumption and price adjustments, suggested that the pace of that improvement "might be faster than earlier expected".

The council discussed and approved the formal framework for implementing the MNB's earlier voiced commitment to cover foreign exchange liquidity needs for energy import payments until the end of the year. Several members stressed that the balance on the FX market might be preserved by providing less FX liquidity than earlier expected, because of the drop in European energy prices and the increasing adjustment of domestic demand for energy.

The council voted unanimously to keep the central bank base rate at 13% at the meeting on October 25, the minutes show. Governor György Matolcsy was absent from the meeting.

MNB rate-setters had signaled an end to the tightening cycle at their monthly policy meeting in September, but said tight monetary conditions would be maintained with a focus on sterilizing liquidity and improving monetary policy transmission. On October 14, the policymakers announced a decision to launch O/N deposit tenders on a daily basis. The central bank has offered the liquidity sterilization instrument at a rate of 18%.