Press release on the Monetary Council meeting of 26 April 2016

26 April 2016

At its meeting on 26 April 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 27 April 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. Inflation remains persistently below the Bank’s target.

The annual inflation rate and core inflation both decreased in March 2016 relative to the previous month. The Bank’s measures of underlying inflation continued to indicate moderate inflationary environment in the economy. Persistently low global inflation contains the increase in domestic consumer price inflation. Core inflation rises gradually as a result of the recovery in household consumption and the pick-up in wages. Inflation expectations remain 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. Over the last year as a whole, the economy grew at a rate close to 3 per cent. Based on monthly indicators, economic activity slowed in the first quarter of 2016. Annual growth in industrial output in February was lower than the high levels recorded at the end of 2015, and the volume of construction output also fell relative to the same period of the previous year. However, according to February data, retail sales grew at a faster pace than in previous months. The employment rate rose and the unemployment rate fell further. The deceleration in funding inflows from the EU leads to a slowdown in growth, but the Bank’s and with a growing significance the Government’s policy measures are making an increasing contribution to the economic recovery. In the Council’s assessment, economic growth accelerates again from the middle of the year and a growth rate of around 3 per cent can be maintained through the Bank’s Growth Supporting Programme as well as 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 households’ precautionary considerations contribute to the expansion in consumption, which in turn provides a considerable support for economic growth in the coming years.

Sentiment in global financial markets has been volatile since the Council’s latest policy decision, mainly driven by expectations related to the monetary policy stance of the world’s leading central banks and news coming from oil markets. Short-term interbank yields and government bond yields have declined 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.

The unconventional, targeted monetary policy instruments introduced by the Bank 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. If the assumptions underlying the March Inflation Report projection hold, inflation will approach the 3 per cent target only in the first half of 2018.

Phase 3 of the Self-Financing Programme has contributed to a decline in long-term government securities yields. The risks of second-round effects resulting in below-target inflation over a sustained period remain, due to persistently low cost-side inflationary pressure, the slowdown in global growth and the historically low level of inflation expectations. The Monetary Council has continued its interest rate cutting cycle in order to mitigate these risks and decided to reduce the central bank base rate by 15 basis points. The Council has left the overnight deposit rate unchanged at -0.05 per cent and lowered the overnight lending rate by 15 basis points to 1.3 per cent. The Monetary Council remains ready to use every instrument at its disposal to contain second-round inflationary effects. In the Council’s assessment, the sustainable achievement of the inflation target points to a further slight reduction in the policy rate.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 May 2016. 

MAGYAR NEMZETI BANK
Monetary Council