Press release on the Monetary Council meeting of 18 December 2018

18 December 2018

At its meeting on 18 December 2018, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 19 December 2018:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to ensure that the consumer price index meets the 3 percent target in a sustainable manner. The volatility of inflation has increased significantly. Therefore, in assessing the outlook, the Monetary Council pays even more attention than usual to developments in the measures of underlying inflation capturing persistent trends. Core inflation excluding indirect tax effects has been rising, which signals the strengthening of persistent inflationary trends. The Hungarian economy has grown dynamically in 2018; however, if the assumptions of the current projection hold, economic growth is likely to slow gradually from 2019. Regarding long-term, sustainable economic growth, the improvement in competitiveness will be given increasing emphasis.

During the autumn months of 2018, volatile items, sensitive to movements in global commodity prices, led to a greater-than-usual volatility of inflation. As a result, the consumer price index rose to 3.8 percent in October, then decreased significantly to 3.1 percent in November. The moderation in inflation was mainly due to a fall in fuel prices in November. However, underlying inflation capturing persistent trends continued to rise. In November, core inflation excluding indirect tax effects increased to 2.7 percent.

Over the short term, the volatility of inflation remains elevated. After a temporary rise in the first quarter of 2019, the consumer price index is expected to fall below 3 percent. In assessing the sustainable achievement of the inflation target over the monetary policy horizon, the Monetary Council pays even more attention than usual to developments in the measures of underlying inflation capturing persistent inflationary trends. In parallel with strong domestic demand, core inflation excluding indirect tax effects is likely to rise above 3 percent in early 2019 and then stays close to 3 percent over the monetary policy horizon. Over the period ahead, incoming data will be key in the assessment of persistent inflationary trends.

According to the detailed data release, the Hungarian economy grew dynamically, by 4.9 percent, in the third quarter of 2018 relative to a year earlier. Household consumption and investment continued to increase. Labour demand remained strong, and the unemployment rate was close to its historically low level. The country’s balance of goods decreased, mainly reflecting robust domestic investment growth and a couple of one-off items. The surplus of the services balance grew significantly. The current account remained in remarkable surplus. Lending to the corporate and household sectors continued to expand in October; however, the proportion of long-term, fixed-rate lending to the corporate sector continued to be low.

Economic growth is expected to continue across a broad range of sectors. Strong domestic demand will continue to play a central role in economic output developments in the coming years. The Hungarian economy has grown dynamically in 2018; however, if the assumptions of the current projection hold, economic growth will slow gradually from 2019. The country’s current account balance is expected to remain in positive territory over the longer term as temporary factors fade and as the surplus of the services balance grows dynamically. The fundamentals of the Hungarian economy are strong, and convergence to developed economies has continued. Regarding long-term, sustainable growth, the improvement in competitiveness will be given increasing emphasis.

Sentiment in international financial markets has been volatile in the period since the Council’s previous interest rate decision. The main factors influencing investors’ appetite for risk were expectations about the monetary policy of the world’s leading central banks and uncertainties related to international trade policies, the debate of Italy’s government budget and the Brexit agreement. Amid increased volatility, oil prices have fallen since the Council’s previous interest rate decision. The current international environment continues to suggest a more cautious approach. The Monetary Council assesses these developments in light of their relevance to persistent inflationary trends.

As regards the external environment, euro-area economic growth fell behind expectations in the third quarter of 2018. The persistence of these developments is uncertain. Headline inflation has been around the 2 percent target, while core inflation staying close to 1 percent persistently signals moderate underlying inflation. Therefore, market expectations about the timing of the first interest rate increase by the European Central Bank (ECB) have shifted to a later date. This suggests that monetary conditions in the euro area may remain loose for a longer period of time.

In terms of the outlook for domestic inflation, the probability of core inflation excluding indirect tax effects capturing persistent trends rising above 3 percent has increased. However, loose monetary conditions in the euro area may remain for a longer period of time. The main factor among these, determining the MNB’s monetary policy decisions, is developments in persistent domestic inflationary trends.

The Monetary Council is prepared for the gradual and cautious normalisation of monetary policy, which will begin with the modification of unconventional instruments. Consistent with the instrument strategy adopted by the Council, looking ahead, the Bank will adjust monetary conditions by creating an optimal combination of two of its instruments: the stock of swap instruments providing forint liquidity and the interest rate corridor. As part of the fine-tuning of unconventional policy instruments affecting long-term yields, mortgage bond purchases will end, and the monetary policy IRS instrument will be phased out by the end of 2018. In addition, the Funding for Growth Scheme Fix will be launched with a total amount of HUF 1,000 billion in January 2019 to raise the proportion of long-term, fixed-rate lending. The MNB will sterilise the liquidity provided under this programme by a preferential deposit facility bearing interest at the central bank base rate.

The Monetary Council left monetary conditions unchanged. In line with this, the Council held the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.15 percent. In addition, the Council left the average amount of liquidity to be crowded-out for the first quarter of 2019 unchanged, at least at HUF 400-600 billion. On the next occasion, in March 2019, the Council will decide on the amount of liquidity to be crowded out and will take this into account in setting the stock of central bank swap instruments.

The Monetary Council is prepared for the gradual and cautious normalisation of monetary policy, which will begin depending on the persistent inflationary developments. Core inflation excluding indirect tax effects is likely to continue to rise in the coming quarters, which the Council will assess in terms of the sustainable achievement of the inflation target. In the period ahead, therefore, incoming data will be of key relevance. The Monetary Council closely monitors incoming macroeconomic data and will decide to adjust monetary conditions depending on their outcome.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 January 2019.

MAGYAR NEMZETI BANK

Monetary Council