Press release on the Monetary Council meeting of 16 October 2018

16 October 2018

At its meeting on 16 October 2018, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 17 October 2018:

In the Council’s assessment, in parallel with the pick-up in domestic demand Hungarian economic output is close to its potential level. Growth of the Hungarian economy will pick up further in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019. The inflation target is still expected to be achieved in a sustainable manner from mid-2019.

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation. Under the flexible inflation targeting regime, the Monetary Council takes account of all factors influencing inflation developments on the five to eight-quarter horizon of monetary policy. These may include developments in commodity prices, changes in the external inflation environment, labour market conditions, the position of the real economy, developments in the exchange rate and credit market conditions. By taking into account all these factors, the Bank is able to assess the likely magnitude and persistence of future price changes, which in turn determine the monetary policy response.

In September 2018, inflation rose to 3.6 percent and core inflation to 2.4 percent. In addition to a sharp rise in volatile items, particularly fuel and unprocessed food prices, the increase in excise taxes on tobacco products, were the main factors contributing to the pick-up in price level. In line with the Bank’s expectations, the measures of underlying inflation were broadly unchanged, staying stable at around 2.5 percent. Both core inflation excluding indirect tax effects and sticky-price inflation stagnated, while demand-sensitive inflation rose modestly. As a result, the difference between the consumer price index and the measures of underlying inflation widened further. Inflationary pressures from wages continued to be moderate. Oil prices have increased since the previous interest rate decision. According to the European Central Bank’s (ECB) projection, underlying inflation will continue to be moderate in the euro area in the coming years as well.

If the assumptions in the September projection hold, the consumer price index will remain above 3 percent in the short term. Beginning from the autumn months, the increase in excise taxes will also contribute to upward pressure on inflation, in addition to fuel and unprocessed food prices, while core inflation excluding indirect tax effects will remain stable around 2.5 percent. With inflation expectations anchored at low levels, second-round effects are not expected to arise. Rising consumption in the September projection will lead to a gradual increase in underlying inflation. As temporary effects fade, the inflation rate is expected to ease back again, and the rise in underlying inflation will ensure that inflation meets the 3 percent target in a sustainable structure from mid-2019.

The Hungarian economy grew strongly, by 4.9 percent in the second quarter of 2018 relative to a year earlier. Data on economic activity suggest that robust economic growth is likely to continue. Labour demand remains strong. The unemployment rate has fallen to a historically low level. Lending to the corporate and household sectors continued to expand in August; however, the proportion of long-term, fixed-rate lending to the corporate sector continues to be low.

Looking ahead, economic growth is expected to continue across a broad range of sectors. The general strengthening of domestic demand will continue to play a central role in economic output developments. In the Council’s assessment, GDP growth will pick up and stand at 4.4 percent in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019. Meanwhile, the country’s current account balance is expected to remain in positive territory over the longer term as well.

On the whole, sentiment in international financial markets has deteriorated in the period since the Council’s previous interest rate decision. Expectations related to the monetary policy stance of the world’s major central banks as well as news about international trade policies, developments in the supply of crude oil and Italy’s government budget were the main factors influencing investors’ appetite for risk. The current volatile international environment continues to suggest a more cautious approach. The Bank assesses these developments in light of their relevance to its primary objective, i.e. the sustainable achievement of the inflation target, focusing on their persistence. Monetary conditions in the euro area may remain loose. The ECB’s decisions may have a significant influence on the Magyar Nemzeti Bank’s monetary policy.

Taking into account the country’s long-term national and economic policy strategy objectives, the Magyar Nemzeti Bank’s Monetary Council increased Hungary’s official gold reserves significantly, in line with its previous decision. Accordingly, the amount of gold reserves expanded from the earlier 3.1 tons to 31.5 tons in October 2018. The Magyar Nemzeti Bank purchased gold for the first time since 1986. Following the significant increase in the physical form of the stock of gold reserves, it has already been transported to Hungary.

The Bank’s primary objective is to achieve the inflation target in a sustainable manner. For this reason, in the Council’s assessment, maintaining the loose monetary conditions is necessary. Consistent with the practice of leading central banks, the MNB is also prepared for the gradual and cautious normalisation of monetary policy. As part of the instrument strategy presented in September, the Monetary Council will phase out the three-month deposit facility by the end of 2018. In the future, required reserves will be the main policy instrument. Looking forward, the Bank will adjust monetary conditions necessary to achieve the inflation target in a sustainable manner by creating an optimal combination of two of its instruments: the stock of swap instruments providing forint liquidity and the interest rate corridor. As part of the fine-tuning of the unconventional policy instruments affecting long-term yields, mortgage bond purchases in the secondary market ended, consistent with the Council’s September decision. In addition, the mortgage bond purchase programme in the primary market will be completed and the monetary policy IRS instrument will be phased out by the end of 2018. Furthermore, the Monetary Council will launch the Funding for Growth Scheme Fix at the beginning of 2019. The MNB will sterilise the liquidity provided under this programme using a preferential deposit facility bearing interest at the central bank base rate.

In order to maintain the loose monetary conditions, the Monetary Council held the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.15 percent. In addition, in September the Council left the average amount of liquidity to be crowded-out for the fourth quarter of 2018 unchanged, at least at HUF 400-600 billion. On the next occasion, in December 2018, the Council will decide on the amount of liquidity to be crowded out and will take this into account in setting the stock of central bank swap instruments.

The Council is prepared for the gradual and cautious normalisation of monetary policy, which will start depending on the outlook for inflation. The inflation target is still expected to be achieved in a sustainable manner from mid-2019. To ensure this, in the Council’s assessment, maintaining the current level of the base rate and the loose monetary conditions is necessary.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 November 2018.

MAGYAR NEMZETI BANK

Monetary Council