27 January 2015
At its meeting on 27 January 2015, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 2.10%.
In the Council’s judgement, Hungarian economic growth is likely to continue. While the pace of economic activity is strengthening, output remains below potential and the domestic real economy is expected to continue to have a disinflationary impact, albeit to a diminishing extent. Despite the pick-up in the components of domestic demand, capacity utilisation is expected to improve only gradually due to the protracted recovery in Hungary’s export markets. With employment rising, the unemployment rate continues to exceed its long-term level determined by structural factors. Inflationary pressures in the economy are likely to remain moderate for an extended period.
Based on the inflation data for December, consumer prices show historically low dynamics. The Bank’s measures of underlying inflation capturing the medium-term outlook still indicate moderate inflationary pressures in the economy, reflecting persistently low inflation in external markets, moderated path of commodity prices and imported inflation, the degree of unused capacity in the economy, subdued wage dynamics and the moderation in inflation expectations. The continued decline in oil prices and the fall in processed food prices have contributed to the further easing in inflation. Domestic real economic and labour market factors continue to have a disinflationary impact and low inflation is likely to persist for a sustained period. However, domestic demand-side disinflationary pressures are likely to weaken significantly in the second half of the forecast period as activity gathers pace, and inflation is likely to reach levels around 3 per cent consistent with price stability in the latter half of the forecast period.
In the Council’s judgement, economic growth is likely to continue even as external demand has weakened slightly. Industrial output continued to grow and the trade surplus rose. The dynamics of retail sales have been stable or increasing slightly in recent months. Looking ahead, domestic demand is likely to be the main engine of growth. The prolonged Funding for Growth Scheme is likely to promote corporate investment this year, but weak global economic activity and lower receipts of EU funding are likely to work in the opposite direction. Household consumption is also likely to pick up gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging. According to seasonally adjusted data, employment was broadly unchanged in November, with the increase in the number of those employed under public employment programmes also playing a role.
International investor sentiment has been volatile since the Council’s latest interest rate decision, with risk aversion dominating financial markets. Global sentiment deteriorated significantly at the end of the year, due to the turbulence in Russian financial markets and the political events in Greece. Then, following a temporary improvement, global risk appetite fell again from the middle of the month, reflecting the further decline in oil prices, and the surprise announcement by the Swiss National Bank. The European Central Bank has decided to extend its asset purchase programme aiming to bring euro-area inflation into line with the inflation target corresponding to price stability. International factors were a major factor behind movements in the forint exchange rate. Domestic risk measures were little changed as the temporary effects of the financial market turbulence at the end of the year dissipated. Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. In the Council’s judgement, a cautious approach to monetary policy is warranted due to uncertainty about future developments in the global financial environment.
The Swiss franc has appreciated significantly against the forint and other currencies after the Swiss National Bank announced that it had abandoned the franc’s peg against the euro. The exchange rate at which Hungarian foreign currency-denominated household mortgage loans would be converted into forints was fixed in advance in November 2014. In agreement with the MNB’s proposal, the conversion was effected in a single step for all households with foreign currency-denominated household mortgage loans. The MNB provided nearly EUR 9 billion liquidity required for settlements and forint conversions, thereby allowing time for participants of the domestic financial system to manage exchange rate risk. Therefore, the appreciation of the Swiss franc may affect the domestic banking sector mainly through losses incurred on Swiss franc-denominated corporate loans and household loans unaffected by the conversion. That, however, is expected to have a moderate impact and is not to pose systemic stability risk.
In the Council’s judgement, there remains a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate in the medium term. The negative output gap is expected to close gradually at the monetary policy horizon. Looking ahead, therefore, the disinflationary impact of the real economy is likely to diminish. Based on data available since the latest policy decision, there has been a shift towards the alternative scenario implying looser monetary policy published in the December 2014 Inflation Report. With current monetary conditions maintained, there have been no second-round effects despite disinflationary trends in external markets, and therefore inflation is likely to move into line with the target in the second half of the forecast horizon. The Council judges that, based on available information, the current level of the central bank base rate is consistent with the medium-term achievement of price stability and a corresponding degree of support to the real economy. If the assumptions underlying the Bank’s projections hold, achieving the medium-term inflation target points in the direction of maintaining current loose monetary conditions for an extended period.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 February 2015.
Magyar Nemzeti Bank
Monetary Council