Press release on the Monetary Council meeting of 20 December 2016

20 December 2016

At its meeting on 20 December 2016, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 21 December 2016:

In the Council’s assessment, Hungarian economic growth continues to pick up from the end of this year. Some degree of unused capacity has remained in the economy, but looking ahead, the disinflationary impact of the domestic real economic environment is gradually dissipating. Inflation rises over the forecast period and reaches the inflation target in the first half of 2018.

Inflation rose in November 2016, in line with the Bank’s expectations. The Bank’s measures of underlying inflation remained broadly unchanged. Looking ahead, whole-economy wage growth is likely to rise further, as a result of continued strong demand for labour and the latest wage agreement. This in turn is likely to raise core inflation through an increase in household consumption. However, with persistently low global inflation and historically low inflation expectations, the consumer price index is expected to rise only gradually. In the current projection, inflation reaches the 3 per cent level consistent with price stability in the first half of 2018.

The Hungarian economy grew by 2.2 per cent in the third quarter of 2016 relative to the same period a year earlier. The strong expansion in household consumption was the main driving force behind growth. Retail sales rose further while industrial production fell in October relative to the same period of the previous year. Outstanding lending to small and medium-sized companies increased by around 7 per cent in the third quarter and the stock of corporate loans has also started to show signs of a turnaround. Outstanding loans in the household sector grew further. Private sector investment picked up and government investment, strongly linked to the use of EU funding, fell sharply. Labour demand remained strong, and therefore the number of employees increased and the unemployment rate fell further. Private sector wage growth accelerated. Household consumption is expected to grow further as wage growth strengthens, which will be supported by the realisation of consumption deferred from previous years. Looking ahead, Hungary’s current account surplus is likely to decrease, driven by rising domestic demand. The Council expects economic growth of over 3 per cent in the coming years, to which the Bank’s and the Government’s measures to stimulate economic growth contribute substantially.

Sentiment in global financial markets has been mostly favourable since the Council’s latest interest rate-setting decision. News from the oil market and expectations about the stability of the euro-area banking sector were the focus of attention. In December, the US Fed and the ECB made decisions in diverging policy directions. As expected, the Fed decided to raise interest rates and, looking ahead, moved towards a tighter policy path. By contrast, the ECB decided to extend its quantitative easing programme. As a result, euro-area monetary conditions, most relevant for Hungarian monetary policy, are expected to remain accommodative for a longer period. The majority of developed market equity indices rose while bond prices declined. The forint weakened against the euro. Yields on government securities fell along the entire yield curve.

Hungary’s strong external financing capacity and the decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. Forward-looking domestic money market real interest rates are in negative territory and are declining even further as inflation rises. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.

In the Council’s assessment, the operation of the monetary policy toolkit, extended in the last half year, has been successful. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of the instruments. The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates. At its meeting in December, the Monetary Council set a HUF 750 billion upper limit on the stock of three-month central bank deposits as at the end of the first quarter of 2017. The Council expects that this decision, consistent with the gradual steps taken so far, will mean the crowding out of at least HUF 100-200 billion additional liquidity from the deposit facility. The Monetary Council aims to ensure that the limit imposed on the stock of three-month deposits exerts its expected easing effect efficiently. The limit is set quarterly. On the next occasion, a decision on its level as at end of the second quarter of 2017 will be made in March 2017.

In the Council’s assessment, some degree of unused capacity has remained in the economy while inflation is rising gradually to the target. The disinflationary impact of the real economy is gradually dissipating over the policy horizon. If the assumptions underlying the Bank’s projections hold, maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Magyar Nemzeti Bank monitors developments in monetary conditions and markets. If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 January 2017.

MAGYAR NEMZETI BANK

Monetary Council