Press release on the Monetary Council meeting of 20 September 2016

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

In the Council’s assessment, Hungarian economic growth will continue to pick up in the remaining part of the year following the temporary slowdown at the beginning of the year. There continues to be a degree of unused capacity in the economy and inflation remains persistently below the Bank’s target. Looking ahead, the disinflationary impact of the domestic real economic environment is gradually decreasing.

In August 2016, consumer prices were slightly lower than a year earlier. Core inflation decreased somewhat relative to the previous month. The Bank’s measures of underlying inflation continue to indicate a moderate inflationary environment in the economy. Inflation is expected to rise gradually into positive range in the coming months. Persistently low global inflation is restraining the pace of increase in domestic consumer prices. Inflation expectations are at historically low levels. Whole-economy wage growth remains strong, which is likely to raise core inflation gradually through rising household consumption. Inflation remains below the 3 per cent target over the forecast period, and only gets close to it by the middle of 2018.

Hungarian economic growth picked up again in the second quarter of 2016, in line with the Bank’s expectations. Growth has been supported primarily by final consumption and net exports and, on the output side, by growing services driven by the pick-up in domestic demand as well as by the correction in industrial and agricultural performance. Whole-economy investment continued to decrease relative to the same period a year earlier, mainly as a consequence of the decline in government investments financed by EU funds. Retail sales expanded in July also. Household consumption is expected to grow further in the coming quarters. Industrial production fell in July relative to the same period a year earlier, caused by the longer factory shutdowns in the summer in various manufacturing sub-sectors. Labour demand remained strong, and therefore the number of employees increased again, while the unemployment rate remained at a low level. The time profile of this year’s economic growth is characterised by duality. The economy picks up following temporary slow growth at the beginning of the year, mainly supported by domestic demand. Economic growth of around 3 per cent can be achieved overall by the extension of the Funding for Growth Scheme, the Growth Supporting Programme, the easing steps of monetary policy as well as the Government’s measures.

Moderate growth early this year has resulted in a more negative output gap temporarily; however, the acceleration in growth and the expansionary impact on demand of next year’s fiscal budget contribute to the closure of the gap. Rising incomes and the pick-up in lending are contributing to the expansion in household consumption, which in turn strongly promotes economic growth in the coming years.

Sentiment in global financial markets has been volatile since the Council’s latest interest rate-setting decision, mainly driven by the release of macroeconomic data in the US and the euro area as well as by expectations about further actions by the world’s leading central banks. Short and medium-term domestic government securities yields and interbank rates fell sharply since July in response to the Council’s earlier announcement about the change to monetary policy instruments. But they have remained broadly unchanged in the weeks since the previous policy decision, while the forint exchange rate remained stable. Hungary’s strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. These factors have also contributed significantly to the fact that the S&P – as the second of the large credit rating agencies – has upgraded Hungary’s debt rating back to investment grade. Forward-looking domestic money market real interest rates are in negative range and are declining even further as inflation rises. However, in the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.

At today’s meeting, the Monetary Council set a HUF 900 billion upper limit on 2016 year-end stock of three-month central bank deposits. Following the decision, according to the expectations of the Monetary Council at least HUF 200–400 billion liquidity will be crowded out from the facility. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of monetary policy instruments. The limit will be set quarterly. On the next occasion, a decision on it’s level as at end of the first quarter of 2017 will be made in December 2016. With this limitation the central bank achieves the loosening of monetary conditions and also the corresponding support to economic growth through a decline in the money market rates. The Magyar Nemzeti Bank closely monitors developments in monetary conditions and markets. 

In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflation remains moderate for an extended period. The disinflationary impact of the real economy is gradually decreasing 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 limitation of the deposit facility are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. If subsequently it is warranted to loosen the monetary conditions further to meet the inflation target, the Monetary Council will stand ready to apply a stronger limitation to three-month deposits.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 October 2016.

MAGYAR NEMZETI BANK

Monetary Council

Budapest, 20 September 2016