Press release on the Monetary Council meeting of 26 January 2021

26 January 2021

At its meeting on 26 January 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 27 January 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. At the end of last year, industrial production and the volume of retail sales grew in several Member States of the European Union. However, the introduction and maintenance of increasingly tighter pandemic restrictions have led to a delay in the economic recovery. As a result, there remains an exceptionally high degree of uncertainty surrounding the pace of global economic recovery.

As a whole, investor sentiment in global financial markets has improved recently. Among other things, risk appetite has been driven by the growing use of the coronavirus vaccine, expectations related to the economic policy of the US, the adoption of the EU budget, the Brexit agreement and news about oil markets. At its policy meeting in January, the European Central Bank (ECB) maintained its loose monetary policy stance. In our region, the Czech and Polish central banks held interest rate conditions unchanged and the Romanian central bank lowered its key interest rate. 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 incoming macroeconomic data over the period since the previous policy meeting are consistent with the projection in the MNB’s December Inflation Report. Industrial activity has continued to recover recently, with production rising by 1.6 percent in November on an annual basis, while construction output rose by 5.0 percent in the period. The trend of construction output has been upwards since June. 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. In November 2020, the unemployment rate fell compared to the previous month, standing at 4.1 percent, a low level even in international comparison, as well.

Due to the second wave of the coronavirus pandemic, the global economic recovery is taking longer than earlier expected. With the restrictive measures, Hungary’s economic activity weakened again in the fourth quarter of 2020. As a result, the MNB expects that GDP may have contracted by 6.0-6.5 percent in 2020, as a whole. Economic activity may begin to normalise from the second quarter of 2021 as the coronavirus vaccine becomes widely available. Hungary’s GDP is expected to rise by 3.5-6.0 percent in 2021 and by 5.0-5.5 percent in 2022.

In December 2020, annual inflation was 2.7 percent, core inflation was 4.0 percent and core inflation excluding indirect tax effects stood at 3.4 percent. Headline inflation was unchanged from the previous month and core inflation rose by 0.1 percentage point. The increase in core inflation reflected the higher price dynamics of alcoholic beverage and tobacco products. Following higher repricing in the summer months, disinflationary effects strengthened from September. In line with this, the last period of the year was generally characterised by lower rate of price inflation. Overall, consumer prices rose by 3.3 percent on average 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, the 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.

In 2020, the accrual-based government deficit may have been around 9 percent of GDP, according to the release by the Ministry of Finance, due to the costs of protection against the coronavirus pandemic, the measures taken under the Economy Protection Action Plan and declining tax revenue resulting from the slowdown in economic growth. The government deficit may have been around the international average in 2020. The government deficit is expected to fall from this year. After falling steadily since 2011, there was a sharp, but temporary increase in the government debt-to-GDP ratio 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.

The Monetary Council reviewed the central bank instruments affecting longer-term yields. Last year, the MNB’s collateralised lending facility managed to provide the necessary amount of long-term liquidity to the banking sector. With the acute phase of the crisis subsiding, the role of the collateralised lending facility gradually decreases. The government securities purchase programme strengthened the effectiveness of monetary policy transmission and contributed successfully to maintaining a stable liquidity position in the government securities market. The stock of government securities in the Bank’s balance sheet has increased by over HUF 1,100 billion since May 2020.

In order to use its instruments affecting longer maturities more effectively, the MNB will reallocate liquidity provided under its individual programmes from the collateralised lending facility towards government securities purchases while keeping its monetary policy stance unchanged. In addition, it will be ready to extend 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 coronavirus, as it offers funding with low and reliable rates to the SME sector with more favourable conditions than before and to a wide range of applications. There has been significant interest from companies in the FGS Go! since it was launched last April. Under the scheme, around 21,500 domestic micro, small and medium-sized enterprises accessed the favourable funding opportunity until the end of December, in the amount of close to HUF 1,500 billion. It is of key importance for the Monetary Council to provide the amount of funding necessary for the continuous operations of SMEs and the realisation of their investment projects during the economic recovery, as well.

At its meeting on 12 January, the Monetary Council reviewed the results of the Bond Funding for Growth Scheme to date and concluded that the Scheme was successful in serving the monetary policy objectives set at its inception. Since the start of the programme, a total of 46 companies successfully issued 53 bond series, raising nearly HUF 900 billion. In view of the high rate of utilisation and the continued keen interest in the programme, the Monetary Council decided to raise the amount available under the Bond Funding for Growth Scheme from HUF 750 billion to 1,150 billion and altered some conditions of the Scheme. By its measures, the Monetary Council will continue to contribute to increasing liquidity in the corporate bond market. 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. The MNB conducted foreign exchange swap tenders providing euro liquidity again at the end of December 2020. In response to the strong demand from market participants for foreign currency liquidity, the Bank ensured the required foreign currency liquidity in full. In addition, through active market presence, it successfully cushioned the spillover of tensions in international swap markets to the domestic market, 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 February 2021.

MAGYAR NEMZETI BANK

Monetary Council