At its meeting on 22 March 2016, the Monetary Council
reviewed the latest economic and financial developments and voted to reduce the
central bank base rate by 15 basis points from 1.35% to 1.20%, with effect from
23 March 2016.
In the Council’s assessment, Hungarian economic growth continues. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. The path of inflation has shifted downwards significantly relative to the December projection and remains substantially below the Bank’s target.
The annual inflation rate and core inflation both decreased in February 2016 relative to the previous month. The Bank’s measures of underlying inflation continued to indicate moderate inflationary pressures in the economy. Core inflation rises only gradually as a result of rising household consumption and moderate wage growth. The persistently low global inflationary environment contains the increase in the domestic consumer price inflation. Inflation expectations fell further and are at historically low levels. Inflation remains below the 3 per cent target over the forecast period, and only approaches it in the first half of 2018.
The Hungarian economy grew dynamically again in the fourth quarter of 2015 following subdued growth in the previous quarter. Over the year as a whole, the economy grew at a rate close to 3 per cent. Based on detailed data, the expansion in services and industry continued to be the main driver of economic growth. The performance of industry weakened in January. According to January data, retail sales grew less strongly than in previous months. The employment rate remained broadly unchanged and the unemployment rate fell again in January. The deceleration in funding inflows from the EU leads to a slowdown in growth, but the Bank’s and the Government’s policy measures continue to contribute to economic recovery. In the Council’s assessment, economic growth of around 3 per cent can be maintained by the Bank’s Growth Supporting Programme and the steps taken by the Government to encourage home construction and to facilitate the faster draw-down of EU transfers. Rising incomes, the pick-up in lending and the gradual decline in precautionary motives contribute to a substantial expansion in consumption, which in turn provides a considerable support for economic growth.
Sentiment in global financial markets has improved slightly overall since the Council’s latest policy decision, mainly drivenby expectations and announcements related to the monetary policy stance of the world’s leading central banks and news coming from oil markets. In March, monetary conditions in the euro area were eased further by the European Central Bank. The forint exchange rate has weakened and long-term government bond yields have fallen 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.
Market yield expectations were in line with the Bank’s forward guidance. The unconventional, targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, an easing in monetary conditions. Forward-looking 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 has a disinflationary impact over the policy horizon. Based on the March Inflation Report projection, the time when the inflation target is met has lengthened as an effect of the persistently and substantially lower cost environment than earlier expected.
Long-term government securities yields fell after the announcement of Phase 3 of the Self-Financing Programme and are likely to continue declining as the announced measures are implemented. However, persistently low cost-side inflationary pressure, the slowdown in global growth and the historically low level of inflation expectations have heightened the risk of second-round effects which result in below-target inflation over a sustained period. In view of the March Inflation Report projection, the Council assesses that the sustainable achievement of the inflation target has made it necessary to implement a comprehensive easing of monetary conditions. This consists of the reduction in the policy rate and the asymmetric narrowing of the central bank interest rate corridor. As a result, the central bank base rate has been reduced by 15 basis points to 1.20 per cent, the overnight deposit rate to -0.05 per cent, i.e. into negative territory, and the overnight lending rate to 1.45 per cent. The Monetary Council remains ready to use every instrument at its disposal to contain second-round inflationary effects. Interest rate cuts will continue as long as monetary conditions become consistent with the sustainable achievement of the inflation target. In addition to the central bank base rate, the Monetary Council will henceforth also decide on the current levels of the overnight deposit and lending rates, that is the width of the interest rate corridor at its interest rate-setting meetings.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 April 2016.
MAGYAR NEMZETI BANK
Monetary Council