Press release on the Monetary Council meeting of 24 July 2018

24 July 2018

At its meeting on 24 July 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 25 July 2018:

In the Council’s assessment, in parallel with the pick-up in domestic demand Hungarian economic output is close to its potential level. Growth of the Hungarian economy will pick up further in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019. The inflation target is still expected to be achieved in a sustainable manner from mid-2019, as the temporary, inflation-boosting effects of oil price changes fade.

The Magyar Nemzeti Bank’s single anchor is inflation. Under the flexible inflation targeting regime, the Monetary Council takes account of all factors influencing inflation developments on the five to eight-quarter horizon of monetary policy. These may include developments in commodity prices, changes in the external inflation environment, labour market conditions, the position of the real economy, developments in the exchange rate and credit market conditions. By taking into account all these factors, the Bank is able to assess the likely magnitude and persistence of future price changes, which in turn determines the monetary policy response.

In June 2018, inflation stood at 3.1 percent and core inflation at 2.4 percent. Rising fuel prices were the main factor contributing to the increase in inflation. Developments in measures of underlying inflation were in line with the Bank’s expectations. Inflation rose slightly above 3 percent, while core inflation was unchanged relative to the previous month in June. The general, dynamic rise in whole economy wages has continued in recent months; however, inflationary pressures from wages continue to be moderate, consistent with the Bank’s expectations. Oil prices have fallen in the past month. According to the ECB’s projections, underlying inflation will continue to be moderate in the euro area in the coming years as well.

If the assumptions in the June projection hold, the consumer price index will remain temporarily slightly above 3 percent in the coming months, reflecting the increase in oil prices. With inflation expectations anchored at low levels, higher oil prices are unlikely to generate second-round effects. Over the medium term, rising consumption leads to a gradual increase in underlying inflation. However, moderate external underlying inflation and inflation expectations stabilising at historically low levels, as well as multistage reductions in employers’ social contributions and the VAT rate cuts this year, are slowing the rise in prices. The inflation rate is expected to ease back again as the direct effects of oil price increases fade, and the rise in underlying inflation will ensure that inflation meets the 3 percent target in a sustainable structure from the middle of 2019.

The Hungarian economy grew strongly, by 4.4 percent, in the first quarter of 2018 relative to a year earlier. Data on economic activity released since the previous interest rate decision suggest that robust economic growth is likely to continue. Labour demand remained strong. The unemployment rate fell to a historically low level. Lending to the corporate and household sectors continued to expand in May.

Economic growth continues in a balanced structure. Looking ahead, the general strengthening of domestic demand will continue to play a central role in economic output developments. The country’s current account balance relative to GDP is expected to remain in positive territory over the longer term as well. In the Council’s assessment, GDP growth will be 4.4 percent in 2018, higher than last year, then, if the assumptions of the current projection hold, it will slow down gradually from 2019.

Sentiment in international financial markets has been mixed in the period since the Council’s previous interest rate decision. Expectations related to the policy stance of the world’s leading central banks, and developments related to global trade policy and the supply of oil influenced investors’ appetite for risk. The Fed continued its gradual tightening of monetary conditions in June. The ECB expects to end its asset purchase programme in December; therefore, the exerted direct effects on the long end of the yield curve will be smaller. However, policy interest rates will remain unchanged at least through the summer of 2019, and therefore the monetary policy environment in the euro area may remain loose. The ECB’s monetary policy decisions may have a significant influence on the Magyar Nemzeti Bank’s monetary policy.

Asset price volatility also increased in domestic financial markets in response to turbulence in international markets; however, there has been a reversal in recent weeks. The Bank assesses these developments in light of their relevance to its primary objective, i.e. the sustainable achievement of the inflation target, focusing on their persistence. Due to the different inflation paths expected in the countries of the region and the different characteristics of inflation targeting regimes, market prices suggest that monetary policy stances by regional central banks will continue to differ.

In the Council’s assessment, maintaining the loose monetary conditions is necessary to achieve the inflation target in a sustainable manner. To this end, the Monetary Council maintained 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.

The Council will maintain the HUF 75 billion upper limit on the stock of three-month deposits. In addition, the Council set the average amount of liquidity to be crowded-out for the third quarter of 2018 at least at HUF 400-600 billion. Furthermore, the Council stated that the actual amount of liquidity to be crowded out must reach a level sufficient to ensure the maintenance of the loose monetary conditions. On the next occasion, in September 2018, 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.

In June, the Monetary Council set the maximum stock of monetary policy interest rate swaps in the first three quarters of 2018 at HUF 900 billion. The Bank will continue mortgage bond purchases and the monetary policy interest rate swap facility as programmes, and therefore they constitute an integral part of the set of monetary policy instruments. Financing costs fell as a result of the mortgage bond purchases, which encouraged issuance in the primary market, thereby facilitating the increase in fixed-rate lending.

The fundamentals of the Hungarian economy continue to be stable. Accompanied by dynamic growth, the country’s external debt has declined significantly, and its net lending continues to be persistently strong. Its fiscal position is sustainable, the budget deficit is low and the public debt-to-GDP ratio has been contracting. The foreign currency debt ratio has fallen sharply. The debt cap rules, to be introduced in the autumn, will facilitate healthy, sustainable growth of housing loans.

The Magyar Nemzeti Bank’s single anchor is inflation. The inflation target is still expected to be achieved in a sustainable manner from mid-2019, as the temporary, inflation boosting effects of oil price changes fade. In the Council’s assessment, maintaining the base rate and the loose monetary conditions is still necessary to achieve the inflation target in a sustainable manner. The current volatile international environment suggests a more cautious approach. The Council will ensure the maintenance of loose monetary conditions, necessary to achieve the inflation target in a sustainable manner, by using the current set of monetary policy instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 August 2018.

MAGYAR NEMZETI BANK

Monetary Council