Press release on the Monetary Council meeting of 28 April 2020

28 April 2020

At its meeting on 28 April 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 29 April 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 the economy have become the MNB’s key priorities. The MNB has recently 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.

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 appeared quickly in a wide range of countries. Currently, there is an exceptionally large degree of uncertainty in judging the time profile of the health emergency and its macroeconomic consequences. Although sentiment in global financial markets has improved slightly in recent weeks, volatility remains extremely elevated. Risk appetite continued to be influenced by the adverse effects on the real economy and money markets resulting from the spread of the pandemic and the related measures. Capital outflows continued in the emerging markets, but their extent fell. Deteriorating outlook for global demand led to a decline in commodity market prices, including global oil prices, which decreased sharply again in April following the fall in March.

Due to the negative economic effects of the coronavirus pandemic, a number of central banks around the world announced further easing measures. The Federal Reserve decided to implement several new lending incentive and liquidity providing instruments. The European Central Bank temporarily loosened its collateral eligibility requirements and eased the conditions of its new bond purchase programme (PEPP). The Czech and the Polish central banks cut policy rates further. The Polish and the Romanian central banks continued to purchase government securities.

The effects of the coronavirus pandemic were not yet reflected in the production and sales data of the Hungarian economy in the first two months of 2020. However, the general deterioration in confidence indicators and sector-specific information on past weeks’ developments have already shown a decline in economic activity. Based on the data release by the National Employment Service, with the coronavirus disease becoming a pandemic, the number of registered jobseekers rose in Hungary in March. This year’s macroeconomic data will 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.

In March 2020, inflation returned to the tolerance band. Inflation expectations remained anchored. Mainly as a result of the sharp decline in fuel prices, inflation is expected to fall below the central bank target in the coming months, before stabilising gradually at 3 percent. 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.

In the past month, the pandemic and the effects of the related measures taken in Hungary and abroad were reflected apparently in the conditions of the Hungarian financial market. Showing high volatility, the forint exchange rate has moved in line with other exchange rates in the region since the outbreak of the coronavirus pandemic. In the past month, the government securities yield curve has flattened.

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 latest 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, while the country’s external financing capacity has remained persistently positive. 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. 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.

In line with its mandate, the Magyar Nemzeti Bank decided to implement a series of coordinated measures in the past month. As part of this, the interest rate corridor was widened and became symmetric. The MNB activated its one-week deposit instrument, whose interest rate may be increased even to the upper bound of the interest rate corridor at its tenders. In addition, the MNB introduced a fixed-rate collateralised lending facility with up to five-year maturity, and it also expanded the scope of eligible collateral and granted exemption from reserve requirements to the banking system. Consistent with the changes to the MNB’s monetary policy instruments, from the second quarter of 2020 the Council will not set a target amount of liquidity to be crowded out of the instruments bearing interest at the base rate.

In addition, at its first April meeting, the Monetary Council decided to launch a government securities purchase programme in the secondary market in order to improve monetary policy transmission and also decided to relaunch its mortgage bond purchase programme to improve the long-term supply of funding to the banking sector. To provide the required funding for domestic companies, the Monetary Council launched the Funding for Growth Scheme Go! (FGS Go!) on 20 April. It also decided to modify certain parameters of the Bond Funding for Growth Scheme (BGS), which may make sustainable and stable funding available for the Hungarian corporate sector over the long term. The MNB will sterilise the additional money created by the FGS Go! and the BGS by using the preferential deposit facility bearing tiered interest for a transitional period and providing higher interest rate for additional lending.

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. In addition, the Council made a decision on the details of its asset purchase programme announced earlier. The purpose of the government securities and mortgage bonds purchase programmes is to prevent damage to the monetary policy transmission and manage economic and financial risks arising from the coronavirus pandemic.

The MNB’s government securities purchases will take place in the secondary market, and may be conducted at auctions organised by the Bank and in individual secondary market transactions. The Bank will make these purchases at market prices. The MNB will not restrict the scope of maturities of government securities to be purchased; however, the purchases will be focused on securities with a minimum maturity of three years. The range of counterparty institutions, eligible to participate in the programme, includes banks and non-banks playing a key role in the government securities market. Mortgage bond purchases will take place in the primary and the secondary markets. Assets to be purchased under this programme are fixed-rate forint mortgage bonds with a minimum original maturity of three years.

Both programmes will be launched by the MNB on 4 May. They will continue in terms of their timeframe and amount as long as warranted by economic and financial developments resulting from the coronavirus pandemic. Based on incoming information, the MNB is ready to fine-tune the programmes, when necessary.

By actively applying the expanded set of central bank instruments, the MNB seeks to ensure that domestic financial market developments remain stable in the current uncertain economic environment. It also aims to provide all economic agents with the required amount of liquidity with favourable conditions. By modifying the 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 13 May 2020.

MAGYAR NEMZETI BANK

Monetary Council