Press release on the Monetary Council meeting of 27 April 2021

27 April 2021

At its meeting on 27 April 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 28 April 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 market developments continue to be primarily driven by the events related to the coronavirus pandemic. The timing of the reopening largely depends on the course of the third wave of the pandemic and the population’s vaccination coverage rate. However, vaccination has progressed more slowly than expected in most countries, and consequently there remains an exceptionally high degree of uncertainty surrounding the pace of global economic recovery.

World trade and global industrial production are already above the levels seen in January 2020. In the first quarter of 2021, the outlook for growth in the United States improved and Chinese economic growth continued. The euro area’s economic performance declined in the first quarter, and therefore the recovery will take longer than previously expected.

In the past month, risk appetite has been driven by developments related to the coronavirus pandemic and global reflation concerns. After a significant increase at the beginning of the year, there was a slight reversal in developed market yields. Since the beginning of 2021, commodity prices have risen significantly, and global oil prices have remained around USD 65.

The European Central Bank continued its asset purchase programmes, and decision-makers indicated that more purchases will be made under the Pandemic Emergency Purchase Programme (PEPP) in the second quarter of 2021. In the CEE region, the Czech and the Polish central bank have left policy rates unchanged since the Council’s previous interest rate decision. As a result of the protracted economic recovery, loose monetary conditions are expected to be maintained by the world’s leading and regional central banks over the longer term; however, decision-makers disagree as to the time frame over which emergency asset purchase programmes should operate.

The Hungarian economy proved to be crisis-resilient to the second wave of the pandemic. The effects of strict lockdowns due to the third wave are expected to be less severe on the real economy than those of the first wave. With the restrictive measures remaining in effect and the interruptions in production chains, the third wave of the coronavirus pandemic is expected to cause a decline in GDP in the first quarter of 2021. In February, construction output declined; however, industrial production already exceeded the level before the crisis, and it moved closer to the trend seen before the pandemic. Although the volume of retail sales declined, households’ confidence indicators and the real net wage bill, which is important in terms of consumption expenditure, grew further at the beginning of the year. The vaccination coverage rate of Hungary’s population is at the top in the European Union; therefore, restrictive measures started to be lifted gradually. In parallel, the recovery in the services sector’s performance may also begin.

In terms of demand and supply, the Hungarian economy exhibits the potential for a rapid recovery. Throughout 2020, the business investment rate stood at a high level, at 27.3 percent, while the unemployment rate remained low compared to international levels. Credit markets continued to expand strongly even in international comparison. The recovery in demand has been driven by an increase in household income, a pick-up in government and private investment and the accelerating withdrawal of EU funds.

GDP is expected to grow by between 4.0 and 6.0 percent in 2021, by between 5.0 and 6.0 percent in 2022 and by 3.5 percent in 2023. Domestic demand may pick up as progress is made in vaccination and in the opening of the economy. Continued growth in investment is key to the economic recovery. The financing environment remains supportive, in which the Bank’s FGS Go! and the Bond Funding for Growth Scheme play a key role. In addition to the current, ongoing capacity improvements, growth in corporate investment is supported by new development projects financed by foreign direct investments. Household investment, in turn, has been stimulated by the Government’s housing allowance programmes. In the coming years, Hungary’s economic performance is likely to improve to a greater extent than the European Union’s average, and therefore real economic convergence is expected to continue.

In March 2021, annual inflation was 3.7 percent, core inflation was 3.9 percent and core inflation excluding indirect tax effects stood at 3.1 percent. Inflation rose by 0.6 percentage points and core inflation excluding indirect tax effects fell by 0.3 percentage points relative to the previous month. The rise in inflation primarily reflected an increase in fuel prices, which accounted for 0.8 percentage points of the pick-up in inflation in March.

Inflation is likely to be highly volatile in the coming months. In analysing longer-term trends, the MNB places great emphasis on the assessment of underlying indicators, especially core inflation excluding indirect tax effects. In the coming months, spikes in inflation will occur due to base effects, rising fuel prices, a further increase in excise duties and demand-supply frictions as the economy restarts. The consumer price index will approach 5 percent in the second quarter. Rising fuel prices and tax changes account for about half of this level. Inflation is likely to return to the central bank tolerance band from the summer months as temporary effects fade. In 2021, annual average inflation is expected to be in the range of 3.8–3.9 percent and core inflation excluding indirect tax effects will be around the 3 percent level.

Spikes in inflation are mainly caused by supply-side and cost factors. With inflation expectations anchored, we do not expect second-round effects according to our baseline scenario. Fading temporary effects, unused capacity in the economy and the moderate external inflation environment are expected to contribute to a decline in domestic prices from the first quarter of 2022. As a result, inflation is expected to stabilise around the central bank target again. The MNB lays special emphasis on developments in inflation expectations following the restart of the economy, and on the neutralisation of potential second-round effects.

The three large credit-rating agencies confirmed that Hungary has a relatively strong economic performance and recovery potential, as well as a solid debt repayment ability. According to the April EDP notification, the accrual-based government deficit was 8.1 percent of GDP in 2020 due to the coronavirus pandemic, but it may decline again from this year. After falling steadily since 2011, gross government debt increased temporarily to over 80 percent of GDP in 2020; however, it is likely to shift to a downward path from this year as economic growth is restored and the deficit declines. Debt financing has been stable, strongly supported by domestic savings. The MNB has raised Hungary’s gold reserves from 31.5 tons to 94.5 tons, thereby strengthening confidence further in the country.

Outstripping expectations, the current account was in a surplus in 2020. The country’s current account balance is expected to improve further in the coming years, driven by the recovery in external demand and the gradual increase in the output of new capacities. With the capital account strongly in surplus, Hungary’s net lending is expected to improve significantly and Hungary’s net external debt to continue to fall further.

In response to the adverse economic effects arising from the coronavirus pandemic, the MNB expanded significantly the central bank balance sheet in 2020. The Monetary Council continues to be ready to manage risks arising from the coronavirus pandemic and to foster the quick and sustainable recovery of economic growth in a targeted way.

At its meeting today, the Monetary Council performed the revision of its government securities purchase programme. In the Monetary Council’s assessment, even during the third wave of the pandemic and in a volatile international financial market environment, the programme has been successful. The purchases by the Bank have contributed to maintaining a stable liquidity position in the government securities market and improved the effectiveness of monetary policy transmission. The MNB will continue to use its government securities purchase programme by maintaining a lasting presence in the market, taking a flexible approach to changing the structure of weekly securities purchases, to the extent and for the time necessary. The Council will still not set a total amount for its government securities purchase programme. In addition to continuously monitoring the implementation of the asset purchase programme, the Monetary Council will perform the next revision when stocks reach HUF 3,000 billion.

The FGS Go! and the Bond Funding for Growth Scheme remain key in the process of economic recovery. 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 held foreign exchange swap tenders providing euro liquidity at the end of March, thereby successfully contributing to maintaining the stability of monetary conditions.

In the Monetary Council’s assessment, the increase in risk aversion vis-a-vis emerging markets and potential second-round effects following the restart of the economy pose the greatest risk in terms of the outlook for inflation. By contrast, the protraction of the pandemic threatens a quick economic recovery and points to a lower inflation path than projected in the baseline scenario.

The MNB continues to be committed to maintaining price stability even during the third wave of the coronavirus pandemic. It is the MNB’s clear intention to prevent the current uncertain environment from causing a sustained rise in inflation. The Council closely monitors developments in investors’ risk appetite in emerging markets and potential second-round inflationary effects resulting from the restart of the economy. The Monetary Council reiterates that if warranted by an increase in upside risks to 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 12 May 2021.

MAGYAR NEMZETI BANK

Monetary Council