The National Bank of Hungary (MNB), which has cut its rate by 75 basis points this year, added that it still sees moderate inflationary pressures due to the unused capacity in the economy and the negative output gap would only close gradually over the next two years.
Hungary's consumer price inflation rate fell by 0.4 percent in September from zero percent in August but the central bank said it expects inflation to move into positive territory in coming months though still remain substantially below its 3.0 percent midpoint target.
In its September inflation report, the MNB cut its inflation forecast for the 2015 average to zero from June's forecast of 0.3 percent and the 2016 forecast to 1.9 percent from 2.4 percent.
Core inflation is expected to rise gradually due to improved domestic demand and higher wages but the persistently low cost environment will contain consumer prices, the bank said.
In September it forecast core inflation of 1.4 percent this year, down from the previous forecast of 1.5 percent, and 2016 core inflation of 2.5 percent, down from 2.8 percent. September core inflation was 1.3 percent, up from 1.2 percent in August.
The central bank also said it the country's economy was continuing to improve, as forecast in the inflation report, with domestic demand making an increasing contribution to growth while government investment is likely to fall as funding from the European Union drops considerably.
In its inflation report, the MNB forecast 3.2 percent economic growth this year, down from June's forecast of 3.3 percent, but held the 2016 forecast steady at 2.5 percent.
In the second quarter of this year, Gross Domestic Product expanded by an annual 2.7 percent, down from 3.5 percent in the first quarter.
The National Bank of Hungary issued the following statement:
"At its meeting on 20 October 2015, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 1.35%.
In the Council’s assessment, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, there continues to be a degree of unused capacity in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains substantially below the Bank’s target.
Consumer prices fell in September 2015. Core inflation was broadly unchanged. The Bank’s measures of underlying inflation indicate moderate inflationary pressures in the economy. Core inflation is likely to rise gradually as a result of an expansion in domestic demand and rises in wages, but the persistently low cost environment contains the increase in consumer prices. The stabilisation of inflation expectations around the target is likely to support that price and wage-setting will be consistent with the inflation target over the medium term as the output gap closes. Inflation is expected to move to positive territory in the coming months, but to remain substantially below the 3 per cent target, and is only likely to rise to levels around 3 per cent at the end of the forecast horizon.
Domestic economic growth continued in the second quarter of 2015. Based on the monthly macroeconomic indicators, underlying growth did not change significantly. Industrial production rose in August 2015 relative to a year earlier. The dynamics of retail sales have been stable in recent months, with their volume increasing across a wide range of products. Employment rose further while the unemployment rate was unchanged as activity increased. Domestic demand is making an increasing contribution to economic growth. Government investment is likely to fall as funding from the EU declines considerably, the impact of which is expected to be mitigated by the gradual pick-up in private sector investment. Domestic economic growth is likely to continue, in line with the latest Inflation Report projection.
Sentiment in global financial markets has been volatile over the period since the Council’s latest policy decision, but this has had little impact on domestic indicators. During the first half of the period, uncertainty about the interest rate increase by the Fed and concerns over growth prospects in emerging economies had a negative impact on global appetite for risk. Global financial market environment improved in the second half of the period as market expectations of the Fed’s interest rate increase were postponed.
Hungarian financial markets were relatively calm in the period, with the forint appreciating slightly against the euro. The domestic CDS spread and long-term government bond yields have decreased since the previous policy decision. Market expectations have moved in line with the Bank’s forward guidance announced in September and are consistent with maintaining the base rate unchanged over the entire forecast horizon. Hungary’s persistently strong external financing capacity and the resulting decline in external debt are contributing to the reduction in its vulnerability. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy. Inflationary pressures are likely to remain moderate, while the negative output gap is expected to close only gradually over the policy horizon. If the assumptions underlying the Bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 4 November 2015."