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Monetary Council expects second-round inflationary pressure to remain moderate

Weak domestic demand and the monetary conditions maintained by National Bank of Hungary (MNB) limited the secondary inflationary effect of tax rises and the weaker forint last year, and the risk of longer-term second-round effects is low, the Monetary Council said on Tuesday.

Assessing inflationary performance in 2011 in a statement, the council said that inflation fluctuated near the upper end of the +/-1% tolerance band around the bank’s 3% inflation target for most of the year.

Annual average inflation fell to 3.9% in 2011 from 4.9% in 2010.

The sharp rise of global unprocessed food and oil fed through domestic processed food prices and domestic fuel prices starting the end of 2010, and these were the main factors pushing inflation over the target in the first half 2011, the Council said. As a result of these effects, the consumer price index (CPI) hovered near 4% in H1.

The second-round effects of the cost shocks had only a modest impact on the CPI, however, as weak domestic demand and loose labour market conditions tempered both prices and wages.

Although inflation fell in H2 as the inflationary impact of the cost shocks faded and domestic demand remained weak, inflation picked up again due to the increases in indirect taxes, the statement said.

The worsening risk assessment of the Hungarian economy beginning late last summer resulted in a sharp weakening of the forint, which in turn raised the prices of imported goods. However, weak domestic demand put a limit on price increases, and the inflationary effect of the sharply weaker exchange rate was modest overall.

The indicators of the longer-term inflationary outlook showed moderate inflationary pressures throughout the year, the statement said.

Under the monetary conditions maintained in 2011 and with domestic demand remaining persistently weak, the risk of inflationary shocks leading to longer-term second-round effects is low, the Council said, adding that it will continue its efforts to bring inflation in line with the inflation target in the medium term.