Press release on the Monetary Council meeting of 26 February 2019

26 February 2019

At its meeting on 26 February 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 27 February 2019:

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 in recent quarters. 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. The recent increase in core inflation excluding indirect tax effects signals a strengthening of persistent inflationary trends. The Hungarian economy grew 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 by structural measures will be given increasing emphasis.

In January 2019, the consumer price index was unchanged at 2.7 percent. In the case of the consumer price index, the increase in core inflation was offset by a fall in fuel prices. Core inflation rose to 3.2 percent and core inflation excluding indirect tax effects increased to 3.0 percent. Core inflation rose mainly due to the stronger price dynamics of market services, in addition to an increase in excise taxes on tobacco products.

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 the coming months, 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.

Based on the preliminary release, Hungary's GDP grew dynamically, by 5.0 percent, in the fourth quarter of 2018 relative to a year earlier, thus the economy grew by 4.8 percent on the whole in 2018. The dynamic expansion in corporate and household lending contributed significantly to last year’s strong economic growth. Household consumption and investment continued to increase. Labour demand remained strong, and the unemployment rate fell to a historically low level in the fourth quarter of 2018. The decline in the balance of goods slowed, while surplus of the services balance continued to improve in the fourth quarter. The current account remained in significant surplus in annual terms. 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 grew 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. Favourable economic developments were reflected in the fact that the international rating agencies S&P and Fitch Ratings upgraded Hungary’s debt rating from ‘BBB-’ to ‘BBB’ level. Regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.

In the period since the Council’s previous interest rate decision, sentiment in international financial markets has been more favourable than earlier. Investors’ appetite for risk was primarily influenced by developments in international trade policies and uncertainties related to the outlook for growth, the Brexit agreement and measures of the world’s leading central banks. Due to the weakening outlook for global, and particularly euro area, activity, the world’s leading central banks have taken a more cautious approach. Based on market expectations about the timing of interest rate increases by the world’s leading central banks, loose monetary conditions may remain for a longer period of time than earlier expected. Oil prices have risen since the previous interest rate decision. The international environment continues to suggest a more cautious approach, as the sustained deterioration in global activity may pose a downside risk to the external inflationary environment. The Monetary Council assesses these developments in light of their relevance to persistent domestic inflationary trends.

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, while 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. In addition, the Funding for Growth Scheme Fix was 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. Accordingly, 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, in December 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 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 13 March 2019.

MAGYAR NEMZETI BANK

Monetary Council