Press release on the Monetary Council meeting of 23 August 2016

23 August 2016

At its meeting on 23 August 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 24 August 2016:

In the second quarter of 2016, the growth of the Hungarian economy picked up again following the temporary slowdown 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 July 2016, consumer prices were slightly lower than a year earlier and core inflation rose somewhat relative to the previous month. The Bank’s measures of underlying inflation continue to indicate a moderate inflationary environment in the economy. Persistently low global inflation is restraining the 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 approaches it in the first half of 2018.

Hungarian economic growth picked up again in the second quarter of 2016, in line with the Bank’s expectations. Retail sales continued to expand at a dynamic rate in June. Household consumption is expected to continue growing in the coming quarters. Industrial production fell in June relative to the same period a year earlier. Labour demand remained strong, and therefore the unemployment rate fell further in the second quarter, accompanied by an increase in the number of employees. 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. The unwinding of adverse one-off factors affecting growth early in the year as well as the steps taken by both the Bank and the Government to support growth will result in the economy picking up further. Economic growth of around 3 per cent can be maintained by the extension of the Funding for Growth Scheme, the Growth Supporting Programme and the Government’s measures to promote housing construction as well as by the faster drawdown and efficient use of EU funding.

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 budget contribute to the closure of the gap. Rising incomes and the pick-up in lending will contribute to the expansion in consumption, which in turn provides considerable support to economic growth in the coming years.

Sentiment in global financial markets has been positive since the Council’s latest interest rate-setting decision. Domestic asset prices have changed little over recent weeks. The forint exchange rate remains stable and yields fell slightly at the entire length of the curve. 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. Following the previous signal by the Council, the change to monetary policy instruments announced in July supports a further reduction in vulnerability and encourages lending using targeted unconventional tools. In view of the assessment of the effects related to the announced measures as well as the volatile global financial environment, the Magyar Nemzeti Bank continues to closely monitor movements in interbank rates and developments in the money market and government securities market. The Monetary Council will make a decision on the required year-end level of the three-month deposit stock and the operational details of the use of the facility in September. 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 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, 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.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 September 2016.

MAGYAR NEMZETI BANK

Monetary Council