Hungary reduces base rate to 5½%; economic growth likely to resume

By Tali David

Minneapolis, Jan. 29 - The Monetary Council of the Magyar Nemzeti Bank decided to reduce its base rate by 25 basis points to 5½% from 5¾% at its meeting Tuesday, according to a press release.

The council of the Hungarian central bank said that economic growth is likely to resume this year following last year's recession. The level of output will be below its potential, and unemployment will remain above its long-term level determined by structural factors. The council expects weak demand conditions to persist, which will ensure that inflation returns to rates close to the 3% inflation target as the impact of temporary shocks wanes.

The council said average annual inflation was 5.7% in 2012, with the 12-month change in consumer prices not falling below 5% in any month of the year.

Inflation slowed in December, with declines in the prices of durable goods, processed foods and fuels being the major contributing factors. According to the release, the moderate pace of underlying inflation reflects the disinflationary impact of weak domestic demand.

There has recently been a significant improvement in the short-term outlook for inflation, due mainly to the government measures affecting the prices of non-core items. However, if companies pass on higher production costs into prices in response to the government measures, it may pose an upside risk to the medium-term outlook for inflation.

The council said it will only consider a further reduction in the policy rate if the medium-term outlook for inflation remains consistent with the bank's 3% target and the improvement in financial market sentiment is sustained.

The abridged minutes of the council meeting will be published on Feb. 13.

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