Press release on the Monetary Council meeting of 20 October 2020

20 October 2020

At its meeting on 20 October 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 21 October 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 effects of the coronavirus pandemic. In October, the number of daily infections rose to record levels globally again. There continues to be an exceptionally large degree of uncertainty surrounding the time profile of the coronavirus pandemic and the speed of the global economic recovery.

Overall, sentiment in global financial markets has been volatile recently and risk indicators have remained elevated. Both the Federal Reserve and the European Central Bank continued their liquidity-providing and asset purchase programmes. In the CEE region, central banks held policy rates close to zero, and the Polish and Romanian central banks continued their government securities purchase programmes. The world’s leading central banks and those in the region are expected to maintain loose monetary conditions over a prolonged period.

The Hungarian economy exhibited a similar decline to that seen in other countries of the region in the first half of 2020. Based on data for the third quarter, economic activity underwent a significant correction after reaching a low point in April and May. In August, the volume of retail sales and data on industrial production rose back to close to their levels a year earlier. At 3.9 percent, the unemployment rate was low in international comparison in August. The corporate sector responded to the challenges arising from COVID-19 primarily by raising the ratio of part-time workers, partly as a result of Government measures. The recovery slowed as the second wave of coronavirus began to unfold; therefore, based on real time data, economic activity continues to fall short of the level seen last year.

Due to the second wave of coronavirus, the economic recovery takes longer than earlier expected. Overall, Hungary’s GDP is expected to decline by between 5.1 percent and 6.8 percent in 2020, which may be followed by growth between 4.4 percent and 6.8 percent in 2021. Economic performance may recover to its pre-crisis level by the turn of 2022.

As a result of coronavirus, pricing decisions in recent months have been more volatile and followed unusual seasonal patterns. With the restart of the economy during the summer months, inflation rose to the upper bound of the tolerance band, which was possibly due to the frontloading of price increases in a few cases, in addition to the implementation of price changes cancelled in previous months. Inflation and core inflation excluding the effects of indirect taxes decreased to 3.4 percent and 3.5 percent, respectively, in September 2020. The effect of several factors jointly caused the fall in inflation. Market services restricted the pace of price rises to the greatest extent, by 0.3 percentage points. In addition, price changes in food prices were also a key factor contributing to the decline.

Looking ahead, developments in underlying inflation are expected to be driven by the overall balance of the upside effects of supply-demand frictions and the growing disinflationary impact of weak demand. The persistence of inflationary effects arising as a result of the economic recovery will also be important for the time profile of the decline in underlying inflation, which the Monetary Council will closely monitor.

The government deficit may amount to 7-7.5 percent of GDP in 2020. The debt-to-GDP ratio is likely to rise in 2020, but is expected to move onto a downward path from 2021 once economic growth is restored and the deficit decreases. The current account balance is expected to show a slight deficit in 2020 and then to improve gradually. With Hungary’s net lending position remaining persistently stable, the country’s external debt ratios will continue to decrease in the coming years.

In the Monetary Council’s assessment, consistent with the risk scenario highlighted in the September Inflation Report, currently the increase in risk aversion vis-a-vis emerging markets poses 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. Consistent with this, on 24 September 2020 the Bank changed the one-week deposit rate from 0.60 percent to 0.75 percent.

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. In order to ensure this, the Bank reintroduced its swap facility providing foreign currency liquidity in September. Due to the Bank’s active presence, there was no tension in the swap market at the end of the quarter. Measures taken at the short end of the yield curve contribute to preserving the stability of monetary conditions and through this to maintaining price stability.

On 6 October, the Monetary Council decided to change certain parameters of the programme of government securities purchases to promote the effectiveness the Bank’s programmes affecting long-term yields. Under the measures, the amount available for purchase of certain series of government securities has been raised from 33 percent to 50 percent. Furthermore, the range of assets available for purchase has been extended to government-guaranteed debt securities issued, using the same strategic parameters as those of government securities purchases. The Bank applies a flexible approach to the amount of its weekly purchases, focusing its purchases on longer maturities. The Monetary Council will use the government securities purchase programme continuously through a lasting market presence to the extent required.

In view of the large-scale utilisation, the Monetary Council raised the amount available under the Bond Funding for Growth Scheme to HUF 750 billion from 23 September. Under the FGS Go!, more than 12,000 companies had access to funding over the period to mid-October, exceeding an amount of 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.

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 4 November 2020.

MAGYAR NEMZETI BANK

Monetary Council