Press release on the Monetary Council meeting of 23 February 2021

23 February 2021

At its meeting on 23 February 2021, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 24 February 2021:

The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy.

Global macroeconomic and financial developments continue to be driven mainly by the events related to the coronavirus pandemic. While industrial production has been less negatively affected so far by the second wave of the pandemic, services continue to be significantly exposed to the effects of pandemic measures. In the fourth quarter of 2020, US GDP rose again and economic performance in the euro area and the region significantly exceeded earlier expectations. However, due to the third wave of the pandemic, the maintenance of restrictions has led to a delay in the economic recovery. The vaccination process has been slower than expected, and as a result there remains an exceptionally high degree of uncertainty surrounding the pace of global economic recovery.

Risk appetite has recently continued to be driven by the growing use of the coronavirus vaccine, expectations related to the economic policy of the US, concerns related to reflation and news about oil markets. Developed market stock indices and long-term yields in developed countries have also risen in general. Oil prices rose significantly to around USD 65.

At its policy meeting in January, the Federal Reserve maintained loose monetary conditions and the European Central Bank also continued its asset purchase programme. In our region, the Czech and the Polish central banks decided to hold interest rate conditions unchanged at their policy meetings in February. Due to the protracted economic recovery, the world’s leading central banks and those in the region are likely to continue to maintain loose monetary conditions over a prolonged period.

The Hungarian economy proved to be crisis-resilient to the second wave of the pandemic. Hungarian GDP grew once again compared to the previous quarter. With the restrictive measures still in effect, Hungary’s economic activity declined by 3.7 percent in annual terms in the fourth quarter of 2020, and it contracted by 5.1 percent overall in 2020. Incoming data on GDP were more favourable than in the December projection, which confirms the rapid recovery potential of the Hungarian economy.

At the end of 2020, industrial activity continued to increase in annual terms; however, construction output declined slightly. Owing to the government subsidies and measures supporting the credit market, the corporate sector has responded to the challenges posed by the coronavirus pandemic mainly by increasing the proportion of part-time workers. Although the unemployment rate rose slightly in December 2020 relative to the previous month, it continued to stand at 4.3 percent, a low level even in international comparison. Economic activity may begin to normalise from the second quarter of 2021 as the coronavirus vaccine becomes widely available. GDP growth in 2021 is expected to be in the upper range of the Bank's 3.5-6.0 percent forecast range announced in the December Inflation Report, implying a faster economic recovery.

In January 2021, annual inflation was 2.7 percent, core inflation was 4.2 percent and core inflation excluding indirect tax effects stood at 3.5 percent. Headline inflation was unchanged from the previous month and core inflation rose by 0.2 percentage point. This was mainly driven by a rise in excise taxes on alcohol and tobacco products in January. Overall, in January 2021 repricing was below that seen in 2020.

Pricing decisions are expected to continue to exhibit high volatility in the coming quarters. As a result of an increase in excise taxes on tobacco products at the beginning of 2021 and base effects, the consumer price index is expected to stand at around 4 percent temporarily in the spring months. Overall, changes in indirect taxes are expected to raise inflation by 0.8 percentage point in 2021 and by 0.1 percentage point in 2022. By contrast, in addition to the moderate external inflation environment, weak domestic demand also points to a slowdown in price growth. Overall, inflation is likely to be 3.5-3.6 percent in 2021 before returning to around the central bank target in 2022. The time profile of the pandemic and the expected economic recovery may continue to result in volatile pricing patterns; therefore, an exceptionally cautious approach is warranted in assessing more persistent inflationary effects.

According to the latest credit ratings by S&P and Fitch, Hungary has relatively strong economic performance and recovery potential, as well as a solid debt repayment ability. Although according to preliminary financial accounts data the accrual-based government deficit may have been around 8.1 percent of GDP in 2020 due to the coronavirus pandemic, it may decline again from this year. After falling steadily since 2011, the government debt-to-GDP ratio increased temporarily to 81 percent of GDP in 2020; however, looking ahead, it is likely to shift to a downward path as the economy recovers and the deficit declines. Debt financing has been stable, strongly supported by domestic savings. The capital account surplus is contributing to maintaining Hungary’s persistent, positive net lending position. As a result, net external debt is expected to decline further in the coming years.

In the Monetary Council’s assessment, the increase in risk aversion vis-a-vis emerging markets continues to pose the greatest risk in terms of the outlook for inflation. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside risks to inflation.

The central bank balance sheet as a proportion of GDP contracted in the years prior to 2020, creating sufficient potential to address economic challenges in a sustainable manner. In response to the adverse economic effects arising from the coronavirus pandemic, the MNB expanded significantly the central bank balance sheet in 2020, thereby supporting the recovery of economic growth as well. The MNB’s balance sheet is of average size in regional comparison, despite the significant expansion. The MNB will be ready to increase its balance sheet further to manage risks arising from the coronavirus pandemic and to foster the quick and sustainable recovery of economic growth in a targeted way.

In line with the January decision of the Monetary Council, the MNB has recently reduced the weekly new liquidity provided through the collateralised lending facility from HUF 30 billion to HUF 10 billion, while raising the weekly purchases of the government securities purchase programme to HUF 60 billion. The stock of government securities in the Bank’s balance sheet has increased by over HUF 1,300 billion since May 2020.

In the past month, the MNB extended its government securities purchases to include government securities with maturities of less than ten years, thereby ensuring continuous liquidity in the government securities market over the middle segment of the yield curve. The Bank will continue to apply a flexible approach to the amount of its weekly government securities purchases, increasing its direct purchases in the secondary market relative to the past. The MNB will use its government securities purchase programme to the extent and for the time necessary by maintaining a lasting presence in the market, and it continues to consider it as a priority to increase the share of longer maturities within the maturity profile of government debt.

In the Monetary Council’s assessment, the FGS Go! plays a key role in mitigating the adverse economic effects of the coronavirus. Under the scheme, over 26,000 domestic micro, small and medium-sized enterprises accessed the favourable funding opportunity until mid-February 2021, in the amount of over HUF 1,700 billion. In addition, since the start of the Bond Funding for Growth Scheme, funds worth HUF 900 billion were raised by large companies until mid-February. The MNB will continue to sterilise the resulting surplus liquidity issued under the programmes in full, using the preferential deposit instrument.

At its meeting today, the Monetary Council left the base rate and the overnight deposit rate unchanged at 0.60 percent and -0.05 percent, respectively, and 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 weekly tenders, in response to the increase in risk aversion vis-a-vis emerging markets. The Bank will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks.

It is a key priority for the MNB that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. Therefore, similarly to previous quarters, the MNB will hold foreign exchange swap tenders providing euro liquidity at the end of March. Through an active market presence, the MNB cushions the spillover of tensions in international swap markets to the domestic market, thereby contributing to preserving the stability of monetary conditions and through this to maintaining price stability.

In the Monetary Council’s assessment, the monetary conditions established at the short end support price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner. In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero. The MNB remains committed to maintaining price stability during the coronavirus pandemic. Consequently, the Council continuously assesses incoming data, closely monitors the persistence of inflationary effects resulting from the restoration of the economy and the possible inflationary effects of financial market developments. If warranted by a change in the outlook for inflation, the MNB will be ready to use the appropriate instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 March 2021.

MAGYAR NEMZETI BANK

Monetary Council