Hungary's central bank keeps key rate on hold, raises 2014 growth estimate to 3.3%

By bne IntelliNews September 24, 2014

The monetary council (MC) of Hungary's central bank decided on September 23 to keep the base rate at the record low of 2.10% for the second consecutive month after ending a 2-year long monetary easing cycle in July 2014, the bank said in a statement on its website. The move was expected by the market and is in line with the bank's guidance announced earlier. The bank will aim to keep rates unchanged for an extended period to support economic growth.

The central bankers agreed that the base rate has reached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the economy.

The MC members believe that the historically low inflation environment is determined by subdued inflation in external markets, the degree of unused capacity in the economy, subdued wage dynamics, lower inflation expectations and the cuts in regulated prices implemented in a series of steps. Domestic real economic and labour market factors will continue to have a disinflationary impact as well.

The rate setters agreed that Hungarian risk premia has remained broadly unchanged during the last quarter. The country' persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. The council judged a cautious approach to policy should be warranted due to uncertainty about future developments in the global financial environment.

In its macroeconomic assessment, the bank noted that economic recovery has continued over the past quarter, with output rising across a wide range of sectors as employment continued to grow. Economic growth is expected to continue reflecting the pick-up in domestic demand. The gradual improvement in employment and rising household real income due to the low inflation are playing a key role in the recovery of household consumption, the bank said.

The bank raised its forecast for the average annual inflation in 2014 to 0.1% from 0% projected in June 2014. Inflation is expected to speed up to 2.5% in 2015, unchanged from previous projection. At the same time, the bank improved its 2014 GDP growth projection to 3.3%. According to the forecast, GDP growth will ease to 2.4% y/y next year. The bank will publish its detailed macroeconomic forecast in a couple of days.

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