Press release on the Monetary Council meeting of 24 September 2019

24 September 2019

At its meeting on 24 September 2019, 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 September 2019:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. Inflation continues to be volatile. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends.

In August 2019, inflation, core inflation and core inflation excluding indirect tax effects stood at 3.1 percent, 3.7 percent and 3.2 percent, respectively. In the summer months, the consumer price index was in line with the MNB’s expectations. However, underlying inflation developments were significantly lower than expected. This was mainly attributable to the slowing price dynamics of industrial goods.

A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation. The significantly lower-than-expected core inflation excluding indirect tax effects and the effects of the slowdown in European economic activity indicate a strengthening in downside risks to the longer-term outlook for inflation. Due to the base effects of the fall in fuel prices last year, the consumer price index is likely to rise again until the end of 2019, and then to stabilise at the level of the 3 percent inflation target following a gradual decline. In the coming months, core inflation excluding indirect tax effects is expected to rise slightly, before decreasing to 3 percent along a lower than previously expected path, due to external disinflationary effects.

The Hungarian economy grew by 4.9 percent in the second quarter of 2019, primarily driven by investment and consumption on the expenditure side, as well as market services, industry and construction on the production side. Labour demand remained strong, and the unemployment rate was close to its historically low level. Due to dynamic import growth, the trade surplus declined in recent quarters, primarily reflecting strong investment activity in the corporate sector.

Economic growth is expected to slow in the coming quarters. Weakening economic activity in Europe is likely to have an increasingly strong effect on the development of Hungarian GDP as well. Consistent with the gradual deceleration in economic growth, the increase in wages is likely to slow. In parallel, the growth rate of consumption is also likely to slow down. Hungary’s export growth may be more muted, reflecting the deterioration in the global and European demand outlook. Hungary’s GDP is expected to grow by 4.5 percent in 2019 and by 3.3 percent in 2020 and 2021, respectively. Despite weakening external activity, the convergence of the Hungarian economy with the euro area is likely to continue in the coming years, with the maintenance of the at least 2 percentage-points growth rate surpluses.

In addition to monetary policy, several government measures jointly strengthen Hungary’s macroeconomic stability and reduce external vulnerability. Since its launch in June, nearly HUF 2,000 billion of Hungarian Government Security Plus has already been purchased. More than half of the purchases was registered as a new source of financing for the government sector. Based on the ratified 2020 Budget Act, the budget deficit-to-GDP ratio is likely to decline to 1 percent, with the maintenance of a significant amount of reserves. After 2019, fiscal policy will remain counter-cyclical in 2020 and, in line with the Convergence Programme, in 2021 as well. The Economy Protection Action Plan announced in May is expected to gradually improve the competitiveness of the domestic economy.

As result of the deterioration of the global economic outlook and the muted inflationary processes, the external monetary policy environment has become looser again. After July, the Federal Reserve reduced its policy rate in September as well. At its latest policy meeting, the European Central Bank (ECB) decided to lower the deposit rate by 10 basis points and restart its asset purchase programme in an open-ended manner. According to the ECB’s communication, policy rates are likely to remain at their present or lower levels until inflation rises close to the central bank target in a sustainable manner. According to global leading central banks’ indications and analysts’ expectations, a looser monetary policy environment will be persistently maintained, and additional loosening measures can be expected.

Sentiment in international financial markets has been volatile since the Council’s previous interest rate decision. Risk appetite was influenced by developments in international trade policies and the Brexit and measures taken by the global leading central banks. Oil prices have risen in the period since the Council’s previous interest rate decision and geopolitical risks point to higher volatility in the oil market.

To improve the effectiveness of monetary policy transmission, the Monetary Council launched its corporate bond purchasing programme with a total amount of HUF 300 billion on 1 July 2019. Under the programme, the MNB purchased corporate bonds in September for the first time, possibly to be followed by further purchases in the near future. The MNB will neutralise excess liquidity arising from bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019 to build a healthier lending structure. Under the scheme, participating credit institutions concluded loan contracts with domestic SMEs totalling nearly HUF 250 billion until the end of August.

The Monetary Council left 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 -0.05 percent unchanged. In addition, in September, the Council raised the average amount of liquidity, to be crowded out for the fourth quarter, by HUF 100 billion from the previous HUF 200-400 billion band to at least HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments. The MNB changes the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council, and the volatility of interbank rates remains at low levels.

In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will be favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation.

In the Monetary Council’s assessment, previously symmetric risks to inflation became asymmetric in the last quarter. The downside inflation risks have strengthened further, reflecting the effects of the slowdown in European economic activity. Due to the measures taken by global leading central banks, the external monetary policy environment has become looser. The Council will assess the effects of these factors on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Monetary Council applies a cautious approach, relying mainly on the incoming data and the projections in the quarterly published Inflation Report. Future developments in the outlook for inflation will be a decisive factor in the necessity of further measures.

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

MAGYAR NEMZETI BANK

Monetary Council