Press release on the Monetary Council meeting of 28 January 2020

28 January 2020

At its meeting on 28 January 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 January 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 December 2019, inflation, core inflation and core inflation excluding indirect tax effects stood at 4.0 percent, 3.9 percent and 3.5 percent, respectively. Annual inflation was 3.4 percent in 2019. The end-of-year increase in inflation mainly reflected the base effect of fuel prices. Core inflation excluding indirect tax effects decreased slightly relative to the previous months. In December 2019, inflation was in line with the MNB’s expectations.

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. In the past quarter, fears of recession subsided in the euro area. As a result, risks to the outlook for domestic inflation became balanced again.

The consumer price index is expected to rise further temporarily, mainly reflecting the increase in fuel and food prices, and then to return to the tolerance band by the end of the first quarter of 2020, before stabilising 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.

In the third quarter of 2019, broad-based economic growth continued. Hungary’s GDP grew by 5.0 percent. Industrial production, construction and the volume of retail sales expanded dynamically during the autumn months. Labour demand remained strong and the unemployment rate was close to its historically low level. With dynamic export growth, the trade surplus in the fourth quarter exceeded significantly its value a year earlier.

In the coming years, the Hungarian GDP is expected to grow at a slightly higher rate than earlier projected. 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. Economic convergence with the euro area economy is likely to continue with the maintenance of the at least 2 percentage point growth surpluses.

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 world economy grew at a more restrained pace in the third quarter of 2019, while global inflation continued to decrease. The euro-area’s leading economies avoided a recession; however, the outlook for growth remained persistently muted. The deterioration in business survey indicators stopped, which may indicate moderation of recession risks, looking ahead. However, the emergence of the coronavirus has increased uncertainty. The spread of the virus could again lead to a deterioration in global growth prospects and an increase in risk aversion in emerging markets.

Sentiment in international financial markets has remained broadly unchanged since the Council’s previous policy decision. Risk appetite was influenced by developments in international trade policies and geopolitical tensions. Following a temporary rise in the beginning of the year, oil prices have declined recently.

The external monetary policy environment has become looser in the last quarter. As a result of the three interest rate cuts in 2019, in the assessment of the Federal Reserve’s decision-makers the monetary policy stance is appropriate to achieve the central bank targets. The European Central Bank left its key interest rates unchanged in January. Looking ahead, communication of the world’s leading central banks does not indicate further loosening measures, while the loose monetary policy environment is expected to be maintained persistently.

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.

To improve the effectiveness of monetary policy, the Monetary Council launched its Bond Funding for Growth Scheme on 1 July 2019, under which, 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 nearly HUF 380 billion until the end of December 2019.

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. In the Monetary Council’s assessment, risks to inflation are symmetric. In the coming years, Hungary’s GDP growth is likely to be slightly higher than earlier projected, while the outlook for growth in the euro area is likely to be persistently muted. Consistent with this, the external monetary policy environment is expected to remain persistently loose; however, forward guidance of the world’s leading central banks does not indicate further loosening measures.

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. The necessity of further measures will be determined by the persistent change in the outlook for inflation, which will be monitored closely by the Monetary Council.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 February 2020.

MAGYAR NEMZETI BANK
Monetary Council