Press release on the Monetary Council meeting of 21 June 2016

21 June 2016

At its meeting on 21 June 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 22 June 2016:

In the Council’s assessment, the Hungarian economy is picking up again following the temporary deceleration at the beginning of the year. A degree of unused capacity remains 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 May 2016, the annual inflation rate and core inflation both decreased relative to the previous month. The Bank’s measures of underlying inflation continued to indicate a moderate inflationary environment in the economy. Persistently low global inflation is restraining the increase in domestic consumer price inflation. Inflation expectations are at historically low levels. Whole-economy wage growth accelerated further, 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 approaches it in the first half of 2018. 

Hungarian economic output grew moderately in the first quarter of 2016 relative to a year earlier. GDP decreased compared with the previous quarter, reflecting strong temporary, one-off effects. The slower drawdown of funding from the EU relative to recent years caused a sharp slowdown in construction output, while temporary factory shutdowns led to a fall in industrial production. However, the volume of industrial output recovered already in April and production rose again. Retail sales continued to expand further in April. Household consumption is expected to rise further in the coming quarters. Labour demand remained strong, and therefore the unemployment rate continued to be low in April. The time profile of this year’s economic growth is characterised by duality. The economy is expected to pick up markedly following temporary slow growth at the beginning of the year. The unwinding of one-off factors as well as the steps taken by both the Bank and the Government to support growth result in the economy picking up again. In June, the Monetary Council decided to increase the total amount available under the Funding for Growth Scheme by HUF 100 billion in order to provide further support to economic growth. On the whole, the Growth Supporting Programme, the expansion in home construction and the faster drawdown of EU transfers help maintain a growth rate of around 3 per cent. 

Moderate growth early this year results in a more negative output gap temporarily; however, the acceleration in growth and the expansionary impact on demand of next year’s budget is likely to speed up the closure of the gap. Rising incomes and the expected pick-up in lending will contribute to the expansion in consumption, which in turn provides a considerable support to economic growth in the coming years. 

Sentiment in global financial markets has been volatile since the Council’s latest interest rate-setting decision, mainly influenced by expectations related to an interest rate increase by the Fed, the release of mixed macroeconomic data in developed countries, uncertainty around the United Kingdom’s EU membership and news from the oil market. Yields on domestic long-term government securities have not changed notably since the previous policy decision. 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. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment. 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, there continues to be a degree of unused capacity in the economy and inflationary pressures remain moderate for an extended period. The real economy’s disinflationary impact is gradually decreasing 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 are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. If the Monetary Council assesses it necessary in the future, it may also decide to use unconventional tools. 

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 July 2016.

MAGYAR NEMZETI BANK
Monetary Council