Press release on the Monetary Council meeting of 25 June 2019

At its meeting on 25 June 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 26 June 2019:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. The factors determining inflation continue to show volatility. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends. In May 2019, inflation was 3.9 percent, while core inflation and core inflation excluding indirect tax effects stood at 4.0 percent and 3.7 percent, respectively. The rise in core inflation excluding indirect tax effects reflected an increase in the rate of market services and processed food prices.

A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and, from the second half of the year, weakening external activity is likely to restrain the pace of price increase. Consistent with this, core inflation excluding indirect tax effects is expected to rise slightly in the coming months, and then, due to external disinflationary effects, to decline gradually to 3 percent from the end of 2019. The increase of excise duty on tobacco products on a six-monthly basis, which is outside the scope of monetary policy, is likely to raise the consumer price index over the entire forecast horizon. This measure does not cause any second-round effects, consequently, does not influence changes in core inflation excluding indirect tax effects.

The Hungarian economy grew by 5.3 percent in the first quarter of 2019, mainly driven by market services, industry and construction. On the expenditure side, in addition to household consumption and investment, net exports also contributed positively to economic growth. Labour demand remained strong, and the unemployment rate was close to its historically low level. Based on monthly preliminary data, the current account remained in surplus in the first quarter of 2019.

Economic growth is expected to slow gradually from the middle of the year, but to remain strong. Subdued economic activity in Europe from the second half of the year is also reflected in the slowdown of growth in Hungary. The Hungarian economy is expected to grow by 4.3 percent in 2019 and by 3.3 percent in 2020. As a result of further dynamic growth in credit markets, the investment rate is likely to continue to rise and stabilise at high levels in the coming years. Regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.

In addition to monetary policy, the new retail government security strategy, the 2020 draft budget and the provisions of the Economy Protection Action Plan to improve competitiveness, are aimed at further strengthening macroeconomic stability and sustainable convergence. The Hungarian Government Security Plus, introduced in June, is expected to raise households’ savings rate, in addition to the structural change of their financial assets. Consequently, an increasing share of rapid wage growth is converted into savings instead of consumption, while the promotion of self-financing also helps to reduce Hungary’s external vulnerability. Based on the draft legislation for next year, the budget deficit-to-GDP ratio – with a significant amount of reserves – is likely to decline to 1 percent. After 2019, fiscal policy will remain counter-cyclical in 2020 as well. Announced in recent weeks, the Economy Protection Action Plan is expected to gradually improve the competitiveness of the domestic economy. The above measures jointly strengthen macroeconomic stability, reduce external vulnerability, and contribute to maintain a sustainable convergence path.

GDP data for the first quarter of 2019 exceeded expectations in many cases; however, the outlook for global economic activity has continued to deteriorate in recent months. Monetary policies across the world’s leading central banks are increasingly cautious. Consistent with the downside risks related to economic activity in Europe and the euro area, after March, the European Central Bank (ECB) modified its forward guidance again in June. According to communications from the ECB, the first interest rate hike shifted to an even later date: interest rates remain at their present levels at least through the first half of 2020, and beyond. Based on the President’s latest indications, a growing number of market agents are pricing in the loosening of monetary conditions. In the case of the Federal Reserve, market agents clearly expect an interest rate cut this year, while the Bank of Japan is likely to maintain its loose monetary policy for a longer period of time than earlier expected.

Sentiment in international financial markets has been volatile in the period since the Council’s previous interest rate decision. Risk appetite was influenced by developments in international trade policies, incoming macroeconomic data and measures taken by the world’s leading central banks. Oil prices decreased significantly in the last month.

To improve the effectiveness of monetary policy transmission, the Monetary Council will launch its corporate bond purchasing programme with a total amount of HUF 300 billion on 1 July 2019. By introducing the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of funding to the domestic corporate sector. Companies have shown considerable interest in bond issuance since the programme was announced at the end of March. As a result of the BGS, complementing the Funding for Growth Scheme Fix launched at the beginning of 2019, funding conditions and liquidity of the corporate bond market are expected to improve significantly, offering an effective alternative to funding from banks. 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 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 June, the Council reduced the average amount of liquidity to be crowded out for the third quarter by HUF 100 billion, from the former HUF 300-500 billion band to at least HUF 200-400 billion and will take this into account in setting the stock of central bank swap instruments. The MNB is ready to change 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 remain favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and, from the second half of the year, weakening external activity is likely to restrain the pace of price increase. Regarding the outlook for inflation, data to be received in the second half of the year will be decisive. Of these, the following are of key importance: the spillover of disinflationary effects of slowing European economic activity, changes in monetary policies of the world’s leading central banks, the effect of the new retail government security on savings, and the economic consequences of counter-cyclical fiscal policy. The Monetary Council will assess their effects on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Council applies a cautious approach, relying mainly on the comprehensive projections for the macroeconomy and inflation of the quarterly published Inflation Report. The 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 10 July 2019.

MAGYAR NEMZETI BANK
Monetary Council