1. 1 Monetary Policy in Hungary 2002

2. 2 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 Main Issues

3. 3 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

4. 4 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

5. 5 Consumer price inflation

6. 6 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

7. 7 New exchange rate system +/- 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

8. 8 Hungarian Forint within the Euro intervention band

9. 9 Real Exchange Rate Indices (1994=100)

10. 10 Consequences of band widening Increased exchange rate and interest rate volatility Full convertibility is necessary Development of derivative markets, more hedging opportunities Increasing money and capital market liquidity

11. 11 Convertible Forint 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

12. 12 Hungarian Government Securities Held by Non-Residents

13. 13 Inflation targeting Inflation target (18 months time horizon): –December 2002: 4.5%, –December 2003: 3.5% yoy inflation +/- 1% tolerance band Regularly published forecasts Increased transparency

14. 14 Monetary policy instruments 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

15. 15 NBH rates and market yields

16. 16 Inflation Inflation Projection Fan Chart (percentage changes on a year earlier)

17. 17 Projections for the CPI and Core Inflation

18. 18 Assumptions of the Inflation Forecast

19. 19 Change of our Projection since February 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

20. 20 GDP Growth (Annualised percentage changes on the previous quarter)

21. 21 GDP Growth and its Components (percentage changes on a year earlier)

22. 22 Determinants of GDP 2002 - stronger domestic demand - recovery of external demand in the second half 2003 - robust external demand - a more modest increase in domestic absorption

23. 23 GDP Growth in EU and Hungary *The Economist poll, NBH projection

24. 24 Inflation Expectations 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

25. 25 Medium-term goal of the NBH Preparing for EU and ESCB membership Meeting the EMU requirements –inflation –long term interest rates –ERM II.

26. 26 Interest rate difference between EMU and Hungarian benchmark yields

27. 27 Advantages of the integration to the Eurozone 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