17 November 2015
At its meeting on 17 November 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 continues. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains substantially below the Bank’s target.
The annual consumer price index and core inflation both rose in October. As a result, inflation returned into positive territory. 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 the consumer price index. The stabilisation of inflation expectations around the target is likely to contribute to price and wage-setting being consistent with the inflation target over the medium term as the output gap closes. Inflation is expected to remain substantially below the 3 per cent target over the coming months, and is only likely to rise to levels around 3 per cent at the end of the forecast horizon.
Based on preliminary GDP data, Hungarian economic growth continued in the third quarter of 2015, at a lower rate than expected. Due to a slowdown in external demand, industrial production weakened slightly in the third quarter relative to the previous period, which may have contributed to the slowdown in economic growth. 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 fell. 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 offset by the gradual pick-up in private sector investment and the Bank’s Growth Supporting Programme. The latter also helps to restore market-based financing and achieve a lasting turnaround in lending over the longer term.
Overall, sentiment in global financial markets has been mixed over the period since the Council’s latest policy decision. During the period, the main factors affecting global appetite for risk were the ECB’s communication suggesting that it would adopt a looser monetary policy stance looking forward, continued uncertainty about the interest rate increase by the Fed, and concerns over growth prospects in emerging economies.
Conditions in Hungarian financial markets were characterised by increased volatility, with the forint depreciating slightly against the euro. The domestic CDS spread and long-term government bond yields have been broadly unchanged since the previous policy decision. Market yield expectations moved in line with the Bank’s guidance that the central bank base rate would be held constant over an extended period. The targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, a loosening of monetary conditions. Forward-looking money market real interest rates are in negative territory and are likely to decline even further as inflation rises. Hungary’s persistently strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. 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 2 December 2015.
MAGYAR NEMZETI BANK
Monetary Council