Press release on the Monetary Council meeting of 26 May 2020

26 May 2020

At its meeting on 26 May 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 27 May 2020:

In the current extraordinary economic circumstances, 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. Consistent with this, mitigating the negative effects of the coronavirus pandemic on the real economy and financial markets and creating the conditions for restarting economic growth have become the MNB’s key priorities. In recent months, the MNB has responded to the emerging challenges by taking a series of coordinated measures, transforming and expanding its set of monetary policy instruments. These changes will allow the MNB to provide the required amount of liquidity to the major sub-markets and to set the appropriate monetary conditions in a targeted and flexible manner.

The coronavirus pandemic hit the global economy in a weakened state. Its negative economic effects appeared quickly in a wide range of countries. There remains an exceptionally large degree of uncertainty in judging the time profile of the health emergency and its macroeconomic consequences. In the first quarter, the economic performance of the US, China and the euro area declined substantially. Despite a significant slowdown, several economies in the Central and Eastern European region continued to grow on a year-on-year basis. A number of indicators showed an improvement in sentiment in global financial markets, while volatility has decreased in recent weeks. Risk appetite continued to be influenced by developments related to the pandemic and the growing tension between the US and China. Global oil prices rose in May.

Due to the negative economic effects of the coronavirus pandemic, a number of central banks around the world maintained loose monetary conditions and announced further easing measures. The ECB left its key interest rates unchanged; however, it eased further the conditions of its targeted, longer-term refinancing operations (TLTRO III), and launched a new refinancing facility (PELTRO) as well. Decision-makers at the Czech central bank cut policy rates once again, while the Polish and Romanian central banks continued to purchase government securities.

The effects of the coronavirus pandemic were also reflected in macroeconomic data for Hungary. According to preliminary data, the Hungarian economy still grew by 2.2 percent year-on-year in the first quarter of 2020. It remains a goal to maintain 2-3 percentage point growth surpluses compared to the euro area. The surplus significantly exceeded this in the first quarter. Despite the adverse effects of the coronavirus, market services made the largest contribution to sustained economic growth. This year’s macroeconomic data will continue 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, investment, the labour market, lending and foreign trade are expected to pick up again as the negative effects wane and economic activity lost temporarily is regained.

In line with expectations, the consumer price index fell below the central bank target in April, primarily reflecting a significant decline in fuel prices. Subsequently, inflation is expected to stabilise gradually at the 3 percent target. Inflation expectations 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.

Domestic financial market conditions were also influenced by the effects of international measures to manage the pandemic in May, in addition to the steps taken by the MNB. Accompanied by a falling volatility, the forint exchange rate was mainly in line with other exchange rates in the region. Long-term government securities yields declined significantly, the government securities yield curve flattened, and market liquidity improved.

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. Consistent with this, the projections by large international organisations (IMF, EBRD) include Hungary among the most resilient economies. In recent years, the domestic household savings rate and the business investment rate have stabilised at high levels. By the end of 2019, Hungary’s net external debt had decreased to below 8 percent of GDP, a historical low; and, looking ahead, its external financing capacity is expected to remain stable and positive. 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 has decided to implement a series of coordinated and targeted measures in recent months. The measures ensure that the required amount of liquidity is available for all economic agents at a wide range of maturities and with favourable conditions. The interest rate corridor has become symmetric, the MNB has activated its one-week deposit facility and introduced a fixed-rate collateralised lending facility with up to five-year maturity. At the beginning of May, disbursements of new loans for micro, small and medium-sized enterprises have started under the Funding for Growth Scheme Go! (FGS Go!). The number of contracts signed shows a swift utilisation of the programme. The FGS Go! and the amendment of certain parameters of the Bond Funding for Growth Scheme allow the domestic corporate sector to obtain sustainable, stable and long-term financing. The long-term supply of funding to the banking sector is also supported by the relaunched mortgage bond purchase programme.

In order to improve monetary transmission, the Monetary Council launched a government securities purchase programme on 4 May. Since the announcement of the programme, long-term government securities yields decreased significantly. The Monetary Council considers the government securities purchase programme to be a crisis management instrument, which it intends to use for the period and to the extent necessary. In the Monetary Council’s view, the current set of monetary policy instruments is appropriate to respond to the economic and financial challenges posed by the coronavirus pandemic. In the Council’s assessment, the previously set goals have been achieved by the transformed set of instruments. The MNB’s steps help to protect the economy during the pandemic and also support its subsequent restart.

At its meeting today, the Monetary Council left the base rate and the overnight deposit rate unchanged at 0.9 percent and -0.05 percent, respectively, and kept 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 the weekly tenders. In the Monetary Council’s assessment, the 0.9 percent level of the one-week deposit rate is appropriate and in line with the MNB’s monetary policy objectives.

By transforming and expanding its set of instruments, the MNB increased its room for manoeuvre in monetary policy and ensured that it is able to give quick responses on the required scale to extraordinary challenges in every sub-market in the future as well. The Monetary Council continuously assesses incoming data and changes in outlook. In line with its statutory mandate, the Magyar Nemzeti Bank will use every instrument at its disposal to achieve price stability and to support the Hungarian economic and financial system.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 June 2020.

MAGYAR NEMZETI BANK

Monetary Council