Press release on the Monetary Council meeting of 26 July 2016

26 July 2016

At its meeting on 26 July 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 July 2016:

In the Council’s assessment, the Hungarian economy is picking 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 June 2016 the annual inflation rate remained unchanged and core inflation fell 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 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.

In the Council’s assessment, domestic economic growth is picking up again as temporary effects wear off. Retail sales continued to expand further at a dynamic rate during the spring months. In May, industrial production rose substantially relative to the same period of the previous year. Household consumption is expected to continue growing in the coming quarters. Labour demand remained strong, and therefore the unemployment rate fell further in May, accompanied by an increase in the number of employees. The time profile of this year’s economic growth is characterised by divergent trends. The economy is expected to pick 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 again. Economic growth of around 3 per cent can be maintained by the extension of the Funding for Growth Scheme, the Growth Supporting Programme as well as the Government’s measures to promote housing construction and the faster drawdown of EU funding.

Moderate growth early this year is expected to result 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 expected 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 volatile since the Council’s latest interest rate-setting decision, mainly influenced by the outcome of the referendum on EU membership in the United Kingdom and uncertainty around the country’s exit from the EU. Domestic financial markets proved stable in the turbulent atmosphere characterising global financial markets. A decline was observed along the yield curve 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. Following the previous signal by the Council, the change to monetary policy instruments announced in July supports 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 monitor movements in interbank rates and developments in the money and government securities markets. The Monetary Council will make a decision on the year-end required level of the three-month deposit 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 10 August 2016.

MAGYAR NEMZETI BANK
Monetary Council