Press release on the Monetary Council meeting of 24 March 2020

24 March 2020

At its meeting on 24 March 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 25 March 2020:

The global coronavirus pandemic poses extraordinary challenges to economies around the world. In a much more uncertain than usual and volatile environment, it is the task of economic policy to mitigate the effects on real economy, to lay the foundations for economic recovery and to foster social cohesion. In this extraordinary macroeconomic environment, the Magyar Nemzeti Bank’s (MNB’s) mandate is still to achieve and maintain price stability, to preserve financial stability, as well as to support the Government’s economic policy. In accordance with these tasks, the MNB has decided to undertake a series of coordinated measures, the objective of these is to provide the required level of liquidity for all economic agents. Consistent with its statutory mandate, the Magyar Nemzeti Bank uses every instrument at its disposal to protect the Hungarian economy, financial system and society.

In 2019, world economic growth fell to a ten-year low. The coronavirus pandemic hit the global economy in a weakened state; its negative economic effects have appeared quickly in a wide range of countries. There is currently an exceptionally large degree of uncertainty in judging the potential macroeconomic consequences and their time profile. There was an enormous deterioration in sentiment in global financial markets: markets were characterised by a general increase in risk aversion and selling pressure. Widespread shortage of dollar liquidity was a key factor contributing to financial market volatility, which led to significant capital outflows from emerging markets. Global oil prices fell by more than 50 percent from December 2019 levels.

Due to the negative economic effects of the coronavirus pandemic, a number of central banks around the world announced easing measures. At two unscheduled meetings, the Federal Reserve (Fed) reduced its policy rate to near zero once again. The Fed took measures to provide large-scale liquidity and restarted its asset purchase programme to mitigate financial market turbulences. In order to ensure dollar liquidity, the Fed loosened the conditions of FX swap lines among the world’s leading central banks, and then broadened the range of central banks participating in the programme as well. The European Central Bank (ECB) left key interest rates unchanged and announced significant loosening and liquidity providing measures. The Czech, the Polish and the Romanian central banks all decided to reduce interest rates as well. With their decision in March, the Polish and the Romanian central bank also started its government security purchase programme.

Hungary’s GDP grew by 4.9 percent in 2019 as a whole. The unemployment rate was close to its historical low. Economic growth was supported mainly by investment and consumption on the expenditure side, and by market services, as well as industry and construction on the production side. The effects of the coronavirus pandemic were not reflected in domestic production and sales data from the beginning of the year yet; however, the general deterioration in confidence indicators and some sector-specific information already show a decline in economic activity. This year’s macroeconomic data are expected to show significant volatility and dichotomy. In the first half of 2020, growth is likely to slow significantly, reflecting the negative economic effects of the pandemic; then domestic growth, the labour market, lending and foreign trade are expected to pick up again as the negative effects wane and lost economic activity is regained.

As seen in other countries of the region, the Hungarian consumer price index rose temporarily above the central bank tolerance band in the first months of the year, due to a few volatile items heavily exposed to world market developments. Inflation continues to show high volatility in the coming months. As a result of the sharp decline in fuel prices from mid-February, the domestic consumer price index is expected to return to the tolerance band as early as in March and then to fall rapidly, in the short term, below the 3 percent central bank target. Inflation expectations continued to remain anchored. Core inflation excluding indirect tax effects is likely to be around 3.2-3.5 percent on average in 2020, before decreasing gradually to 3 percent.

The fundamentals of the Hungarian economy are strong: the economic policy pursued over the past decade has contributed to maintaining the country’s macroeconomic balance and has significantly reduced its external and internal vulnerability. The household saving rate and the business investment rate stabilised at high levels, while the country’s external financing capacity remained persistently positive. By the end of 2019, Hungary’s net external debt had decreased to around 8 percent of GDP, a historical low; and, looking ahead, its external financing capacity is expected to remain stable. Budget deficit is low, remaining around 2 percent of GDP over the past several years; and the government debt-to-GDP ratio has been falling continuously as well.

The Magyar Nemzeti Bank’s single anchor is inflation, its primary objective is to achieve and maintain price stability. At the beginning of 2020, higher inflation than in the December 2019 projection suggested the intensification of upside risks; however, the coronavirus pandemic called for a comprehensive reassessment of the economic outlook. The spread of the pandemic results in a rapid decline in expected inflation. Inflation is expected to return to the tolerance band as early as in March, then to fall below the central bank target of 3 percent in a few months. The baseline projection is surrounded by even significantly higher uncertainty than usual. The Monetary Council’s risk assessment has also changed substantially. The global coronavirus pandemic is more likely to bring about alternative risk scenarios resulting in inflation below the baseline projection and more subdued growth. There are swift changes in the macroeconomic environment; therefore, the Monetary Council continuously reassesses the outlook.

At its current policy meeting, 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 March the Council left the average amount of liquidity to be crowded out for the second quarter of 2020 unchanged at a minimum of HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments. The MNB changes 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.

To mitigate the pandemic’s negative economic effects and to ensure the required level of liquidity, the Magyar Nemzeti Bank decided to implement coordinated measures. By expanding the scope of collateral coverage with loans to large corporations, the MNB increased liquidity potentially available for the banking sector by around HUF 2,600 billion. Loans to large companies can be placed as collateral already from 23 March 2020. In addition to the 1, 3, 6 and 12-month tenders announced every Monday in the same way, the MNB also announces one-week FX swap tenders providing forint liquidity on a daily basis from 17 March 2020 until further notice to maintain the appropriate level of liquidity for the banking sector and to smooth liquidity developments. In March, the total stock of central bank FX swap instruments rose by over HUF 250 billion to close to HUF 2,200 billion.

The measures taken by the MNB’s Financial Stability Council aim to mitigate the effects of the coronavirus pandemic on the financial intermediary sector. This package of measures reduces banks’ administrative burden related to bank supervision and ensures flexible adjustment to prudential requirements, e.g. capital requirements, on a temporary basis. Furthermore, the central bank strengthens banks’ capital position and ensures a stable funding structure of banks by modifying macro- and microprudential regulations.

In accordance with the MNB’s proposal, the Hungarian Government announced a moratorium on corporate and household loan repayments. This payment extension is a precautionary restructuring measure, which helps to address the temporary difficulties faced by debtors. It is also important for banks to resolve the liquidity difficulties of the real economy, thereby preserving clients’ payment ability. Postponing repayments until a later date affects the operation of the banking system; nevertheless, the MNB considers it highly important to provide the liquidity required for the sector’s operations at all times, thereby supporting the maintenance of financial stability. Acting on its own authority, the MNB will also take the necessary steps. Accordingly, a moratorium was also introduced in the Funding for Growth Scheme (FGS); the Monetary Council is assessing the possibility of relaunching the MNB’s mortgage bond purchase programme to increase bank liquidity, while the Financial Stability Council has temporarily loosened its regulation on mortgage bond funding.

Today the Monetary Council also took further liquidity providing measures to enhance the effectiveness of monetary policy. The Monetary Council decided to introduce a new fixed-rate collateralised loan instrument with maturities of three, six and twelve months as well as three and five years. Lending will be provided at a fixed interest rate by the MNB with unlimited liquidity. In addition, the MNB released domestic counterparty credit institutions, subject to reserve requirements, from the reserve requirement until a further decision is made. The decision is with immediate effect. The regulation on reserve requirements is no longer needed to meet starting from the reserve maintenance period beginning in March 2020.

The Magyar Nemzeti Bank’s primary objective is to achieve and maintain price stability. Inflation is expected to fall below the central bank target in the coming months, before stabilising gradually at 3 percent. The Monetary Council monitors closely and assesses continuously the incoming data, as well as the effects of the coronavirus pandemic on the macroeconomy and the financial market. To address the challenges posed by the pandemic, it is key to ensure the required level of liquidity. In order to preserve effective monetary policy transmission, the Monetary Council is ready to take further measures to provide additional liquidity.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 April 2020.

MAGYAR NEMZETI BANK

Monetary Council