Members agreed that the CPI projection in the bank’s quarterly Inflation Report, published at the same time as the rate decision, had not changed significantly from the previous report published in May, and continued to see CPI easing close to the 3% target in 2010 at the earliest.
The Council said prospects for growth remained unfavorable, and a pick-up in external demand was unlikely to be a driver of economic recovery in the mid-term in light of the worsening outlook for Europe and the whole world. The domestic macroeconomic environment, however, continued to be supportive of the disinflation process.
Members agreed that upside risks to inflation had diminished as a result of falling commodity prices. As a result, risks to the inflation projection were more symmetrically distributed. Some members noted, however, that the projection could shift strongly upwards or downwards in the coming months, due to the high volatility of commodity prices. Several other members pointed out that service price inflation and wage inflation continued to exceed the level consistent with the inflation target, suggesting that inflation expectations remained elevated. On another view, however, the high degree of uncertainty surrounding wage data did not permit solid conclusions to be drawn regarding the future course of inflation expectations. Also, the rate of wage growth in manufacturing was more moderate than in the services sector.
Several members noted that the improvement in the country’s external financing position and the effects of changes in the monetary policy regime made it difficult to assess inflationary prospects. Others stressed that the council should be prepared for negative surprises, as central banks were facing more difficulties in their efforts to reign in inflation.
Several members said reducing inflation persistence was the most important challenge for Hungarian monetary policy, but others said that the current tight monetary conditions might lead to a further deterioration in net exports and a slowdown in economic activity.
Most members agreed that, because of uncertainty surrounding commodities prices, which have a strong impact on the outlook for inflation, the council should hold off on a rate change and leave open the possibility for a rate hike or a cut.
The Council has left the base rate unchanged since a 2bp rise that took effect on May 27. The Council raised the base rate by a combined 100 basis points between the end of March and that of May, deciding on rate increases at each of its monthly rate-setting meetings. Before that, the last change – a 25bp reduction – happened in September 2007.
The council will hold its next rate-setting meeting on September 29. (MTI – Econews)
