Monetary Policy in Hungary
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Monetary Policy in Hungary. 2002. Main Issues. Changing framework of monetary policy New law on central bank Shift of the exchange rate regime Inflation targeting announced Where do we stand Approaching EU and EMU. New law on central bank. “… to achieve and maintain price stability”

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Main Issues

  • Changing framework of monetary policy

    • New law on central bank

    • Shift of the exchange rate regime

    • Inflation targeting announced

  • Where do we stand

  • Approaching EU and EMU


New law on central bank

  • “… to achieve and maintain price stability”

  • “Without prejudice to its primary objective, the NBH shall support the economic policy of the Government…”

  • Newly defined main tasks = ESCB related tasks

  • Prohibition of monetary financing

  • Stronger independence (institutional, personal, operational, financial)

  • New decision making bodies: Monetary Council, Executive Board

  • No privileged access of the public sector


Increased transparency of monetary policy

  • Monetary Council meets twice monthly

  • Pre-announced meeting calendar

  • Public statement after every meeting

  • Quarterly Report on Inflation

  • Report on Financial Stability (twice a year)

  • Occasional press conferences, meetings with analysts, NBH Web site



New exchange rate régime, reasons behind abandoning the former régime

  • Disinflation process came to a halt

  • High and persistent inflation expectations

  • Limited range and effectiveness of monetary policy instruments due to the narrow band

  • Costs of sterilisation

  • Certain restrictions on capital movements had to remain in place


New exchange rate system former régime

  • +/- 15% intervention band

  • Conform to ERM II.

  • Nominal appreciation will prove to be an efficient tool of disinflation

  • Importance of exchange rate channel in small open economies



Real Exchange Rate Indices former régime

(1994=100)


Consequences of band widening former régime

  • Increased exchange rate and interest rate volatility

  • Full convertibility is necessary

  • Development of derivative markets, more hedging opportunities

  • Increasing money and capital market liquidity


Convertible Forint former régime

  • 16th of June, 2001: lifting all remaining restrictions on the free movement of capital

  • Fully liberalised capital account

  • Meeting OECD and EU obligations

  • Emergence of euroforint markets



Inflation targeting former régime

  • Inflation target (18 months time horizon):

    • December 2002: 4.5%,

    • December 2003: 3.5% yoy inflation

  • +/- 1% tolerance band

  • Regularly published forecasts

  • Increased transparency


Monetary policy instruments former régime

  • Two week deposit rate

  • Overnight interest rate corridor

  • Foreign exchange market intervention

    • verbal

    • open-market

  • NBH bonds as sterilisation instruments (recently suspended)

  • Minimum reserve requirement



Inflation former régimeInflation Projection Fan Chart(percentage changes on a year earlier)




Change of our Projection since February former régime

  • Central projection: higher than the figures in

  • the February Report

  • in February in current

  • projection

  • CPI, end-2002 4.8 5.3

  • CPI, end-2003 3.3 3.4


GDP Growth former régime(Annualised percentage changes on the previous quarter)


GDP Growth and its Components former régime(percentage changes on a year earlier)


Determinants of GDP former régime

  • 2002

  • - stronger domestic demand

  • - recovery of external demand in the second half

  • 2003

  • - robust external demand

  • - a more modest increase in domestic absorption


Gdp growth in eu and hungary
GDP Growth in EU and Hungary former régime

*The Economist poll, NBH projection


Inflation Expectations former régime

  • Reuters survey - market analysts

  • Expectations increased relative to the results of the January survey:

  • End-2002 : 5.4% End-2003: 4.3%

  • Background: inflation in each of the first three months of the year turned out to be worse than the market expected

  • The averages of the forecasts continued to be inside both the target band and the 30% probability range around the

  • Bank’s forecast


Medium-term goal of the NBH former régime

  • Preparing for EU and ESCB membership

  • Meeting the EMU requirements

    • inflation

    • long term interest rates

    • ERM II.



Advantages of the integration to the yieldsEurozone

  • Additional growth due to

    • Permanently low interest rates

    • Expanding foreign trade

    • Decreasing transactions costs

    • Lack of exchange rate risks

  • Estimated long term yearly net gain:

  • 0.6-0.9% of GDP


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