Press release on the Monetary Council meeting of 28 February 2017

28 February 2017

At its meeting on 28 February 2017, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 1 March 2017:

In the Council’s assessment, Hungarian economic growth continues to pick up. Some degree of unused capacity has remained in the economy, but looking ahead, the disinflationary impact of the domestic real economic environment is gradually dissipating. Inflation rises over the forecast period and reaches the inflation target in the first half of 2018.

Due primarily to base effects, inflation rose further in January 2017, while the Bank’s measures of underlying inflation remained broadly unchanged. In the coming months, the price index is likely to rise further temporarily due to the base effects. Thereafter, inflation is likely to decrease again in the spring months as these effects gradually fade. Whole-economy wage growth is likely to remain strong, as a result of continued strong demand for labour and the wage agreement at the end of last year. The upward effect of this on costs is likely to be offset by the reduction in employers’ social contributions and corporate taxes. According to our expectations, to a smaller extent this leads to higher core inflation and, to a greater extent, to a reduction in the trade surplus through an expansion in household consumption. With historically low inflation expectations, the consumer price index approaches the inflation target gradually, and is projected to reach the 3 per cent level consistent with price stability in the first half of 2018.

Hungarian economic growth continued in the fourth quarter of 2016. In December, the volume of retail sales increased further and industrial production fell slightly relative to the same period a year earlier. Including self-employed persons, outstanding lending to small and medium-sized companies increased by nearly 12 per cent in 2016. Furthermore, the total stock of corporate loans also increased markedly, by more than 4 per cent. The MNB’s Market-based Lending Scheme has supported significantly this dynamic growth: the banks participating in the Scheme overperformed their net lending commitment of HUF 195 billion for SMEs by more than 50 per cent in 2016 on the whole. The turnaround in household lending experienced last year has proved lasting. Labour demand remained strong, and therefore the number of employees increased and the unemployment rate fell further. In parallel with strong wage growth expected to continue this year, household consumption is likely to grow dynamically, which will be supported by the realisation of consumption deferred from previous years as well. Hungary’s current account surplus is expected to fall to nearly a half of its 2016 amount over the forecast horizon, driven by rising domestic demand. The Monetary Council expects annual economic growth of over 3 per cent both this year and the next, to which the Bank’s and the Government’s measures to stimulate economic growth contribute substantially.

Global financial markets have been volatile since the Council’s latest interest rate-setting decision and risk indicators have fallen slightly overall. Developed market equity indices rose and the majority of yields on long-term government securities declined. The forint appreciated against the euro. In the domestic government securities market, yields at maturities of up to one year were broadly unchanged and those at longer maturities rose. The amount of liquidity crowded out following the introduction of an upper limit on the stock of three-month deposits has had a marked influence on money market rates. As a consequence, the three-month BUBOR has dropped to a historical low level of 23 basis points and forint yields in the FX swap market have also fallen further.

Hungary’s strong external financing capacity and the decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. Forward-looking domestic money market real interest rates have fallen substantially over recent years and are expected to remain in negative territory for a prolonged period. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.

At its meeting in December 2016, the Monetary Council set a HUF 750 billion upper limit on the stock of three-month central bank deposits as at the end of the first quarter of 2017. The Monetary Council expects that this decision will mean the crowding out of at least HUF 100-200 billion additional liquidity from the deposit facility. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of monetary policy instruments. The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates. The Monetary Council intends to ensure that the limit imposed on the stock of three-month deposits exerts its expected easing effect efficiently. The limit is set quarterly. On the next occasion, a decision on its level as at end of the second quarter of 2017 will be made in March 2017.

In the Council’s assessment, some degree of unused capacity has remained in the economy, but the disinflationary impact of the real economy is gradually dissipating over the policy horizon. Inflation rises over the forecast period and reaches the Bank’s target in the first half of 2018. If the assumptions underlying the Bank’s projections hold, maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Magyar Nemzeti Bank monitors developments in monetary conditions and markets. If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 15 March 2017.

MAGYAR NEMZETI BANK

Monetary Council