At its meeting on 23 February 2016, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 1.35%.
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. Inflation remains substantially below the Bank’s target.
The annual inflation rate was unchanged and core inflation has remained broadly the same in January 2016. The Bank’s measures of underlying inflation continued to indicate moderate inflationary pressures in the economy. Inflation may be lower over the short term than earlier expected, reflecting the effect of low oil prices. Core inflation is likely to rise gradually as a result of an expansion in household consumption and an acceleration in wage growth, but the persistently low global inflationary environment contains the increase in the domestic consumer price index. Inflation expectations fell to a historic low. Inflation is expected to remain below the 3 per cent target over the forecast period, and is only likely to approach it by the end of the forecast horizon.
The Hungarian economy grew dynamically again in the fourth quarter of 2015 following a subdued pace in the previous quarter. By this, the economy showed a growth rate of close to 3 per cent in 2015. Based on monthly production indicators, robust growth was supported by the performance of industry and the expansion in retail sales. Industry’s value added may have risen again in the fourth quarter; the short-term prospects of domestic industry are strong. Based on data for December, retail sales growth was stable, as in previous months, with the volume of sales increasing across a wide range of products. Employment increased slightly and unemployment continued to decline. Slower growth in emerging markets and the deceleration in funding from the EU will lead to a slowdown in growth in the first half of this year. A recovery is expected from the second half of 2016, mainly reflecting the improving economic performance of Hungary’s export markets as well as the Bank’s and the Government’s policy measures. In the Council’s assessment, the Bank’s Growth Supporting Programme as well as the steps taken by the Government to encourage home building and to help the fast draw-down on EU transfers are necessary to maintain growth of around 3 per cent. In addition to these factors, rising household consumption is likely to support the economic expansion in the coming years.
Sentiment in global financial markets has deteriorated slightly since the Council’s latest policy decision, mainly driven by concerns about the outlook for growth, the monetary policy stance of the world’s leading central banks and news coming from oil markets. Equity indices in developed and Asian countries fell sharply, reflecting uncertainties about future developments in oil markets and as an effect of some weaker-than-expected macroeconomic data. Domestic financial markets remained stable even in the deteriorating investor environment. The forint exchange rate has been broadly unchanged and long-term government bond yields have overall been lower in the period since the previous policy decision. Hungary’s persistently 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 cautious 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 that the base rate would be held constant over an extended period. The unconventional, targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, a loosening 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, the reduction in unused capacity is stopping temporarily as economic growth slows in the first half of 2016. The negative output gap will close only at the end of the policy horizon as a result of the re-acceleration of growth. Inflationary pressures remain moderate over a sustained period. Based on available information, the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.
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. The Monetary Council constantly monitors whether the resulting looser monetary conditions ensure the sustainable achievement of the inflation target. In this context, the Council closely examines developments in the foreign monetary environment, particularly the measures of the European Central Bank. The Monetary Council may ease monetary conditions further in view of the March Inflation Report.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 March 2016.
MAGYAR NEMZETI BANK
Monetary Council