Hungarian central bank stands pat in August, expects inflation to rise temporarily in months ahead

During its meeting on Tuesday, the Hungarian central bank’s Monetary Council reviewed the latest economic and financial developments. The central bank kept the policy rate on hold as expected.

The central bank revised up its economic growth forecast. Some degree of unused capacity has stayed in the economy; however, this is expected to be gradually absorbed as output grows dynamically.

The central bank stated that the consumer price index is expected to rise temporarily in the months ahead, before easing to current levels by the end of the year. To a smaller degree, the growth in household consumption is likely to lead to higher core inflation and to a greater degree, to a reduction in the trade surplus.

Moderate imported inflation and historically low inflation expectations and the VAT rate cuts, announced for the next year, have been decelerating the rise in domestic prices. In the baseline projection, the 3 percent inflation target is likely to be achieved in a sustainable manner from early 2019.

Mainly driven by the solid growth in investment alongside continued expansion in household consumption, the rise in domestic demand would continue to play a central role in economic growth. The Hungarian current account surplus is likely to drop in the forecast horizon in response to rising domestic demand. Economic growth in 2017 would also be underpinned by the fiscal budget and the stimulating impacts on investment of EU funding. The Monetary Council expects stable annual economic growth of between 3 percent and 4 percent over the coming years.

According to the Monetary Council, the external environment continues to pose a downside risk to inflation. The council stated that it would be prepared to further ease monetary conditions using unconventional, targeted instruments to guarantee the monetary conditions necessary to meet the inflation target in a sustainable manner.

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