Press release on the Monetary Council meeting of 25 February 2020

25 February 2020

 At its meeting on 25 February 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 26 February 2020:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. Inflation continues to be volatile. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends.

In January 2020, inflation, core inflation and core inflation excluding indirect tax effects stood at 4.7 percent, 4.0 percent and 3.7 percent, respectively. The temporary increase in inflation at the beginning of 2020 mainly reflected developments in fuel and food prices. The consumer price index exceeded the projection in the December Inflation Report.

A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while persistently muted external activity is restraining the pace of inflation. The consumer price index is expected to return to the tolerance band by the end of the first quarter of 2020, and to stabilise at the 3 percent inflation target in the second half of the forecast horizon. Inflation expectations remain anchored. In the first quarter of 2020, core inflation excluding indirect tax effects is expected to remain around its current level, and then to decrease gradually.

Based on the preliminary release, the Hungarian economy grew by 4.5 percent in the fourth quarter of 2019. Growth was driven by market-based services more strongly and industry and construction to a lesser degree. Hungarian GDP rose by 4.9 percent in 2019 as a whole. Labour demand remained strong and the unemployment rate was close to its historically low level. At the end of 2019, the trade surplus exceeded the value a year earlier.

Growth of the Hungarian economy has slowed; however, economic convergence with the euro area economy is expected to continue with the maintenance of the at least 2 percentage point growth surpluses. In the private sector, strong wage growth is expected to continue and may remain double-digit in 2020, as well. The rate of consumption growth is likely to slow somewhat. The household savings rate is expected to be persistently high. In line with the favourable financing environment, companies’ investment activity is expected to remain buoyant. Strong investment activity is likely to increase imports over the short term, but the creation of new production capacities is expected to support Hungary’s exports and potential output growth over the longer term. Net exports made an almost neutral contribution to economic growth in 2019 and are expected to make a positive contribution again between 2020 and 2022. Hungary’s GDP is likely to grow by 3.7 percent in 2020 and by 3.5 percent in 2021 and 2022, respectively.

In addition to monetary policy, both the Hungarian Government Security Plus (MÁP+) and counter-cyclical fiscal policy strengthen Hungary’s macroeconomic stability and reduce external vulnerability. The MÁP+ contributes to the maintenance of high savings rate. Fiscal policy will make counter-cyclical reserves in the coming years, as well. The gradual improvement in economic competitiveness contributes to the maintenance of economic growth on a sustainable path. The credit rating agency S&P has upgraded its outlook on Hungary's sovereign rating from stable to positive. In its justification, the credit rating agency highlighted that Hungarian economic growth exceeded its projection, while macroeconomic imbalances remained contained.

The majority of the world economy continued to grow at a moderate pace. Growth in the euro-area’s leading economies slowed in the fourth quarter of 2019. The outlook for growth continues to be subdued and inflation remains below the target in the euro area. Looking ahead, uncertainty related to the real economy and the financial market may be increased further by the coronavirus. The spread of the virus could again lead to a deterioration in global growth prospects and an increase in risk aversion in emerging markets.

Overall, sentiment in international financial markets has rather deteriorated since the Council’s previous interest rate decision. Changes in risk appetite were mainly affected by uncertainty caused by the coronavirus. The dollar has permanently appreciated recently, which also affects developments in global capital flows. The forint exchange rate has been highly volatile since the Council’s previous interest rate decision, while the interbank yield curve has shifted upwards.

According to the communication of the world’s leading central banks, the loose monetary policy environment is expected to be maintained for a sustained period. The Federal Reserve’s decision-makers left the policy rates unchanged at their rate-setting meeting in January and pointed out that the current monetary policy stance was appropriate. Of the region’s central banks, the Czech National Bank raised its policy rate in February, while the National Banks of Poland and Romania kept interest rates unchanged.

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 December the Council left the average amount of liquidity to be crowded out for the first 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. The stock of swap instruments has declined since mid-January, causing short-term yields to rise by 40-60 basis points. Looking ahead, with the remaining level of swap instruments stock, banking system liquidity is likely to narrow further.

To improve the effectiveness of monetary policy, the Monetary Council launched its Bond Funding for Growth Scheme on 1 July 2019. Under the Scheme, the MNB started bond purchases in September 2019. Taking into account the high utilization of the scheme, the Monetary Council raised the original total amount of HUF 300 billion to HUF 450 billion from 1 January 2020 with all other conditions left unchanged. The MNB will neutralise excess liquidity arising from bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019 to build a healthier lending structure. Under the scheme, participating credit institutions concluded loan contracts with domestic SMEs totalling over HUF 400 billion until the end of January 2020.

In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will be favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while persistently muted external activity is restraining the pace of inflation.

Following a temporary rise, the consumer price index is expected to return to the tolerance band by the end of the first quarter of 2020, and then to stabilise at the 3 percent inflation target in the second half of the forecast horizon. The outlook for growth in the euro area is likely to be persistently muted and inflation is expected to remain below the target over the entire forecast horizon. Looking ahead, a persistently loose external monetary policy environment is expected.

The Monetary Council will assess the effects of these factors on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Monetary Council applies a cautious approach, relying mainly on the incoming data and the projections in the quarterly published Inflation Report. On the next occasion, the Monetary Council will carry out a comprehensive assessment of macroeconomic developments in the March Inflation Report. Based on this, it will determine the extent of step necessary to achieve the inflation target. If a sustained change in the outlook for inflation warrants it, the Monetary Council will be ready to use every instrument at its disposal.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 March 2020.

MAGYAR NEMZETI BANK

Monetary Council