Press release on the Monetary Council meeting of 15 December 2020

15 December 2020

At its meeting on 15 December 2020, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 16 December 2020:

The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy.

Global macroeconomic and financial developments continue to be driven mainly by the events of the coronavirus pandemic and the news related to the development of the vaccine. Following a decline in the second quarter of 2020, the performance of the world’s large economies showed a significant correction in the third quarter. However, due to the second wave of the pandemic and the increasingly tighter pandemic restrictions introduced, the economic recovery has been delayed. As a result, there remains an exceptionally high degree of uncertainty surrounding the pace of global economic recovery.

Sentiment in global financial markets has improved recently, reflecting favourable news related to the development of the vaccine, an improvement in the economic outlook and the prior adoption of the European budget and the recovery fund. Nevertheless, risk indicators have remained at a high level. At its policy meeting in December, the European Central Bank (ECB) left policy rates unchanged, but further easing measures were announced. The ECB decided to increase the envelope of the Pandemic Emergency Purchase Programme (PEPP) by EUR 500 billion to a total of EUR 1,850 billion, and eased the conditions of its TLTRO III programme. In addition, the ECB will also conduct additional longer-term refinancing tenders to provide the banking system with the necessary amount of liquidity. In our region, the Czech, the Polish and the Romanian central banks held their policy rates unchanged at low levels. Due to the protracted economic recovery, the world’s leading central banks and those in the region are expected to maintain loose monetary conditions over a prolonged period.

After reaching a low point in April and May, domestic economic activity underwent a significant correction. In the third quarter of 2020, Hungary’s GDP rose by 11.4 percent relative to the previous quarter but fell by 4.6 percent from its level a year earlier.

In general, the global economic recovery is taking longer than earlier expected due to the second wave of the coronavirus pandemic. With the restrictive measures, Hungary’s economic activity is likely to weaken again in the fourth quarter of 2020. As a result, overall GDP is expected to decline by 6.0-6.5 percent in 2020. Economic activity may begin to normalise from the second quarter of 2021 as the coronavirus vaccine becomes widely available. Hungary’s GDP is expected to rise by 3.5-6.0 percent in 2021 and by 5.0-5.5 percent in 2022.

In November 2020, annual inflation was 2.7 percent, core inflation was 3.9 percent and core inflation excluding indirect tax effects stood at 3.3 percent. Following higher repricing in the summer months, disinflationary effects strengthened from September. More subdued price growth primarily reflected changes in market services, fuel and food prices. Based on incoming data, the inflation rate is likely to be somewhat lower, at 3.4 percent, in 2020 relative to the September projection.

Pricing decisions are expected to continue to exhibit high volatility in the coming quarters. As a result of an increase in excise taxes on tobacco products at the beginning of 2021 and base effects, the consumer price index is expected to stand at around 4 percent temporarily in the spring months of 2021. Tax effects resulting from the new administrative measures are expected to raise inflation by 0.4 percentage point in 2021 and by 0.1 percentage point in 2022. In terms of underlying inflation, a prolonged economic recovery is likely to cause disinflationary effects to be persistent. In addition to the moderate external inflation environment, weak domestic demand also points to a slowdown in price growth. Overall, inflation is likely to be 3.5-3.6 percent in 2021 before returning to around the central bank target in 2022. The time profile of the pandemic and the expected economic recovery may continue to result in volatile pricing patterns; therefore, an exceptionally cautious approach is warranted in assessing more persistent inflationary effects.

In 2020, the government deficit is likely to rise to 8-9 percent of GDP due to the costs of protection against the coronavirus pandemic, the measures taken under the Economy Protection Action Plan and declining tax revenue resulting from the slowdown in economic growth. However, the government deficit in 2020 is likely to be around the international average. From 2021 the government deficit is likely to decrease. After falling steadily since 2011, the government debt-to-GDP ratio is expected to rise temporarily in 2020; however, it is likely to shift to a downward path from 2021 as the economy recovers and the deficit declines. The capital account surplus is contributing to maintaining Hungary’s stable, positive net lending position. As a result, net external debt is expected to decline further in the coming years.

In the Monetary Council’s assessment, the increase in risk aversion vis-a-vis emerging markets continues to pose the greatest risk in terms of the outlook for inflation. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside risks to inflation.

The central bank balance sheet has contracted in recent years, creating sufficient potential to address economic challenges in a sustainable manner. In response to the adverse economic effects arising from the coronavirus pandemic, the MNB expanded significantly the central bank balance sheet, thereby supporting the recovery of economic growth as well. The MNB’s balance sheet can still be considered of average size in regional comparison, despite a significant expansion this year. The MNB will be ready to increase the size of its balance sheet further to manage risks arising from the coronavirus pandemic and to foster the quick recovery of sustainable economic growth.

The government securities purchase programme contributed successfully to maintaining a stable liquidity position in the government securities market and strengthened the effectiveness of monetary policy transmission. The stock of government securities in the Bank’s balance sheet has increased by over HUF 900 billion since May 2020. The MNB continues to use the government securities purchase programme and to settle for a lasting market presence in the secondary government securities market. The MNB will use the programme to the extent and for the time necessary. The Bank applies a flexible approach to the amount of its weekly purchases, concentrating its purchases on longer maturities.

In the Monetary Council’s assessment, the FGS Go! plays a key role in mitigating the adverse economic effects of coronavirus, as it offers cheap funding with reliable rates to the SME sector with more favourable conditions than before and to a wide range of applications. There has been significant interest by companies in the FGS Go! since it was launched in April. Under the scheme, over 17,000 domestic micro, small and medium-sized enterprises accessed the favourable funding opportunity until the end of November, in the amount of close to HUF 1,200 billion. During the economic recovery, it is of key importance for the Monetary Council to provide the amount of funding necessary for the continuous operations of SMEs and the realisation of their investment projects, which also fosters the recovery of economic growth.

By the end of November 2020, over 260 companies registered for the Bond Funding for Growth Scheme. By the end of the period, 40 companies successfully issued 46 bond series, raising nearly HUF 800 billion. The MNB will continue to sterilise the resulting surplus liquidity issued under the programmes in full, using the preferential deposit instrument.

At its meeting today, the Monetary Council left the base rate and the overnight deposit rate unchanged at 0.60 percent and -0.05 percent, respectively, and the overnight and the one-week collateralised lending rates at 1.85 percent. The MNB will continue to set the one-week deposit rate at weekly tenders, in response to the increase in risk aversion vis-a-vis emerging markets. The Bank will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks.

It is a key priority for the MNB that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. Therefore, the MNB will conduct foreign exchange swap tenders providing euro liquidity at the end of December as at the end of September. The Bank will hold the four announced tenders with no quantitative limit, and it still may use its international master repurchase agreements to finance them. Measures taken at the short end of the yield curve will contribute to preserving the stability of monetary conditions and through this to maintaining price stability.

In the Monetary Council’s assessment, the monetary conditions established at the short end support price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner. In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero. The MNB remains committed to maintaining price stability during the coronavirus pandemic. Consequently, the Council continuously assesses incoming data, closely monitors the persistence of inflationary effects resulting from the restoration of the economy and the possible inflationary effects of financial market developments. If warranted by a change in the outlook for inflation, the MNB will be ready to use the appropriate instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 January 2021.

MAGYAR NEMZETI BANK

Monetary Council