THE MONETARY COUNCIL’S STATEMENT IN THE JUNE 2015 ISSUE OF THE INFLATION REPORT
23 June 2015
At its meeting on 23 June 2015, the Monetary Council reviewed the latest economic and financial developments and voted to reduce the central bank base rate by 15 basis points from 1.65% to 1.50%, with effect from 24 June 2015.
THE MONETARY COUNCIL’S STATEMENT ON MACROECONOMIC DEVELOPMENTS AND ITS MONETARY POLICY ASSESSMENT
In the Monetary Council’s assessment, persistently loose monetary conditions are consistent with the achievement of price stability.
In the Council’s assessment, the medium-term achievement of the Bank’s inflation target and a corresponding degree of support to the real economy point in the direction of maintaining loose monetary conditions for an extended period. In addition to the primary goal of meeting the inflation target, the Council also takes into account the condition of the real economy and incorporates financial stability considerations into its decisions.
The performance of the global economy has continued to be subdued in recent months. Inflation rates around the world remain at low levels.
Significant differences remain across the individual regions in terms of economic growth. Of the world’s developed regions, growth in the euro area picked up slightly on the preliminary estimate in the first quarter of 2015, broadly in line with expectations. By contrast, the US economy contracted relative to the previous quarter. Growth has been stable or slowing in most of the major emerging market economies. Global inflation remains moderate, reflecting low crude oil prices and subdued demand, and inflationary pressure in the global economy is likely to remain moderate looking ahead. The monetary policy stance of globally influential central banks points to the direction of persistently loose monetary conditions: the ECB has continued its quantitative easing policy within the framework of its extended asset purchase programme, the Bank of Japan has maintained the pace of its asset purchases and the Federal Reserve is likely to fine-tune the appropriate timing and magnitude of its interest rate increase likely being postponed to a later date. Monetary conditions remain loose overall and, consequently, global interest rate and liquidity conditions continue to be supportive.
In the Council’s assessment, inflation is likely to be below the inflation target this year and next, and is expected to rise to levels around 3 per cent only towards the end of the forecast period.
The Council expects inflation to be significantly below the inflation target over the short term. Data available in recent months were slightly higher than the projection in the March issue of the Inflation Report, mainly reflecting higher-than-expected fuel prices. Inflation has departed from its historical low in recent months and is likely to remain in positive territory looking ahead. Core inflation is likely to rise gradually as the effects of the low-cost environment fade, domestic demand picks up and wages increase. However, inflation is expected to approach levels around the 3 per cent target towards the end of the forecast period, reflecting moderate underlying inflation. The stabilisation of inflation expectations around the target is likely to ensure that price and wage-setting will be consistent with the inflation target over the medium term as domestic demand growth strengthens.
Domestic economic growth is likely to continue to be robust, supported by rising external demand, in addition to growing domestic demand.
Growth in the domestic economy has continued over recent period. In the coming years, domestic demand is likely to remain the main driver of growth; however, rising exports reflecting strengthening growth in Hungary’s export markets are also expected to support domestic economic growth. The low inflation environment and the improvement in the labour market will contribute to household real income growth, which in turn is expected to facilitate household consumption. The conversion of foreign currency loans will reduce the household sector’s vulnerability, which may facilitate the gradual easing of consumers’ precaution. In addition to the general improvement in economic activity, the Funding for Growth Scheme also supports private sector investment. Household investment activity is expected to strengthen at the forecast horizon, due to the pick-up in the housing market and the extension of the housing subsidy system. Export growth is likely to be strong, reflecting higher growth in Hungary’s export markets. The negative output gap is expected to close at the end of the forecast period, and therefore the real economic environment is likely to continue to have a disinflationary impact in the coming quarters.
The economy’s external vulnerability continues to decrease.
Hungary’s external financing capacity continued to increase in the fourth quarter of 2014. Based on the four-quarter values, the trade surplus rose again, with domestic agents using a significant amount of EU transfers also in the final quarter. Looking at the structure of external financing, the outflow of debt liabilities continued in 2014, and consequently, the decline in Hungary’s debt ratios as well. Non-debt liabilities have increased overall. Looking ahead, the external financing capacity is expected to remain robust, exceeding 9 per cent of GDP in 2015. Net exports are expected to rise further, reflecting the expected improvement in external demand and the positive impact on the terms of trade of the decline in oil prices. Transfers from the EU will presumably be lower in 2016. The expected stabilisation of the deficit on the income balance is likely to reflect the combined effect of the decline in interest expenses and rising profits of foreign-owned companies, in addition to a falling debt path. The continued very high net lending is likely to contribute to a gradual decline in the country’s external debt ratios.
Sentiment in international financial markets was volatile but rather unfavourable.
In April, the positive effect of strong macroeconomic data from the euro area offset the negative effect of political events in Greece, mixed macroeconomic data form the US and geopolitical tensions. However, global investor sentiment deteriorated throughout the latter, greater part of the period, reflecting the downgrade of Greek sovereign debt and the postponement of debt repayments as well as weak macroeconomic data from the US economy. Of the domestic risk indicators, the CDS spread has increased slightly and long-term yields on forint-denominated bonds have risen significantly in the period since publication of the March Report, in line with international trends. The forint has depreciated against the euro in the past quarter, due mainly to international factors. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.
The macroeconomic outlook is surrounded by both upside and downside risks.
The Monetary Council considered three alternative scenarios around the baseline projection in the June Report, which might influence significantly the future conduct of monetary policy. The rise in yields in developed markets may lead to an increase in the risk premium on developing markets, and therefore the inflation target can be achieved with tighter monetary policy than assumed in the baseline projection. Mounting geopolitical tensions may involve a protracted decline in external demand and a sudden, sharp increase in the risk premium, and therefore tighter monetary policy than assumed in the baseline projection ensures the achievement of the inflation target at the forecast horizon as well. On the other hand, the alternative scenario assuming persistently low cost environment and increasing second-round effects may lead to lower inflation and stronger economic growth, which may justify even looser monetary conditions than the baseline projection.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate. The real economy is likely to have a disinflationary impact at the policy horizon and the output gap is expected to close only gradually.
Based on available data, the risk of second-round effects materialising due to excessively low inflation expectations has moderated. In view of the June Inflation Report projections, following a comprehensive assessment of the medium-term outlook for inflation, the Council assesses that the medium-term achievement of the inflation target points to the direction of further, slight easing of the policy rate.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 July 2015
Magyar Nemzeti Bank
Monetary Council