Press release on the Monetary Council meeting of 26 March 2019

At its meeting on 26 March 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 March 2019:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. In February 2019, inflation stood at 3.1 percent and core inflation at 3.5 percent. The increase in core inflation mainly reflected higher inflation of processed food and market services, to which rises in volatile unprocessed food and fuel prices also contributed in the case of the overall consumer price index. Core inflation excluding indirect tax effects stood at 3.2 percent in February following a value of 3.0 percent in January. Volatile items continue to influence inflation. Therefore, in assessing the outlook, the Monetary Council pays more attention to developments in the measures of underlying inflation capturing persistent trends. Since mid-2018, the consumer price index has been continuously fluctuating around 3 percent, and core inflation excluding indirect tax effects rose to 3 percent at the beginning of 2019, therefore the MNB has met its inflation target.

A dichotomy is observed between the factors determining the developments in inflation and core inflation excluding indirect tax effects. Persistently buoyant domestic demand is boosting, and weakening external activity is restraining the pace of price increases. In the coming quarters, inflation will fluctuate around the 3 percent central bank target. Core inflation excluding indirect tax effects is expected to continue to rise until the autumn months and then to decline from the end of 2019.

In 2018, the Hungarian economy grew by 4.9 per cent, which was largely supported by the strong expansion in corporate and household lending. Household consumption and investment continued to increase. Labour demand remained strong, and the unemployment rate was close to its historically low level. Developments in the current account balance were influenced by two opposite effects. The balance of goods fell, while the services balance rose.

Economic growth is expected to slow gradually from 2019, but to remain strong. As a result of the dynamic growth in credit markets, the investment rate is likely to stabilise at high levels. Higher real incomes are expected to contribute to a further expansion in household consumption and savings. However, regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.

There has been a significant deterioration in the outlook for global growth recently. Recent data from the United States, the euro area and China mostly point to a slowdown in economic activity. In addition, risk appetite was influenced by developments in international trade policies and by uncertainties related to the Brexit agreement. As a result, the world’s leading central banks became more cautious. The Federal Reserve announced the gradual conclusion of its balance sheet reduction. Based on market expectations, monetary conditions are likely to remain loose for a longer period than earlier expected. This has been reflected in the declining long-term yields in developed countries since the beginning of 2019. Oil prices have increased somewhat recently.

Due to the deteriorating economic outlook in Europe and downside risks to inflation related to the euro area, the European Central Bank (ECB) has modified its forward guidance. Consequently, the first interest rate hike has been shifted to a later date. Furthermore, the ECB will launch a new series of quarterly targeted longer-term refinancing operations (TLTRO-III) to improve the effectiveness of monetary policy transmission and to maintain favourable bank lending conditions. As a result, the central bank balance sheet is expected to remain essentially unchanged for a prolonged period. Due to the shift in the first interest rate hike to a later date and balance sheet policy, monetary conditions in the euro area will remain loose for a longer period of time.

The MNB has met its inflation target. To maintain price stability, the Monetary Council deemed it necessary to modify monetary conditions. Accordingly, the Council raised the overnight deposit rate by 10 basis points to -0.05 percent, and left the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate unchanged at 0.9 percent. Furthermore, the Council reduced the average amount of liquidity to be crowded-out for the second quarter of 2019 by HUF 100 billion to at least HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments.

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 a new monetary policy instrument, the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of the funding to the domestic corporate sector. Under the programme, the Bank will purchase bonds having a good rating issued by non-financial corporations. The MNB will neutralise excess liquidity arising from the bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The Bank is publishing the considerations underlying the introduction and the most important features of the programme in the form of a background material and it will publish the document containing details of the conditions until the end of April 2019. The new programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019.

By taking these measures, the Monetary Council ensures the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will remain favourable. A dichotomy is observed between the factors determining the developments in inflation. Persistently buoyant domestic demand is boosting, and weakening external activity is restraining the pace of price increase. The Monetary Council will assess the effects of this 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 in the quarterly published Inflation Report.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 April 2019.

MAGYAR NEMZETI BANK

Monetary Council