The Monetary Council of the National Bank of Hungary (MNB) believes that the recovery of the Hungarian economy is likely to continue over the next two years, while the level of output will remain below its potential throughout the period, the MNB said in a statement on Tuesday, explaining the Monetary Council's decision to leave the bank's base rate unchanged at 6%.
Domestic demand is expected to remain subdued. Consequently, inflation may settle around the Bank's target by the end of 2012 even without policy tightening, despite the cost shocks hitting the economy.
The decline in consumer prices in recent months was in line with the Monetary Council's expectation. Inflation fell back to close to 3% in July, partly as a result of a decline in unprocessed food prices and strict measures taken against attempts to raise administered prices. By contrast, core inflation continued to rise, due to the pass-through of higher commodity prices. The restraining effect on price and wage-setting of the persistent weakness in domestic demand and high unemployment is likely to be a key determinant of inflation as the first-round effects of the cost shocks wear off; however, consumer price inflation may remain above target in the coming months. It may be necessary to maintain interest rates at their current level over a sustained period in order to meet the target for CPI inflation in the medium term.
The picture painted by the latest data on economic activity was weaker than the Monetary Council expected. External demand has recently been the main driver of economic growth; however, there is some evidence that global activity is slowing. The effect of the global slowdown on Hungarian exports may be partly offset by the implementation of large-scale investment projects, mainly in the car industry. The trade surplus is expected to remain high as export growth slows and imports weaken, reflecting subdued domestic demand.
The Council maintains its view that household consumption is unlikely to pick up significantly in the near future. It may take longer for households to adjust their balance sheets as a result of the recent appreciation of the Swiss franc, which in turn may delay the recovery in consumption growth. Tight credit conditions and uncertainty surrounding the global economic environment and domestic consumption continue to impede the recovery in corporate investment.
Hungary has also been affected by the decline in global risk appetite due to the euro-area sovereign debt crisis and uncertainty surrounding the outlook for growth in developed countries. The Monetary Council has decided to leave interest rates unchanged in light of the above considerations. Over the period ahead, the Council's interest rate decisions may be influenced by the success of measures to solve the euro-area debt crisis, in addition to expected developments in domestic inflation.