Press release on the Monetary Council meeting of 27 July 2021

27 July 2021

At its meeting on 27 July 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 July 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, as well as its policy on environmental sustainability under the Bank’s extended mandate effective from 2 August 2021.

Over the past months, the reopening of economies has begun, the pace of which has been driven by developments in the pandemic and the population’s vaccination level. World trade and global industrial production are already above the levels seen before the pandemic. In June, forward-looking confidence indicators of the manufacturing and services sectors suggested a positive outlook. However, a repeated pick-up in case numbers in recent weeks indicates that the fourth wave of coronavirus is approaching.

International risk appetite deteriorated due to the impending next wave of the pandemic, global supply problems and reflation concerns. Consistent with this, the US dollar appreciated against developed and emerging market currencies. Commodity prices have risen significantly since the beginning of 2021. Global oil prices eased back from USD 77 at the beginning of July to around USD 70 by the middle of the month.

At its policy meeting in July, the European Central Bank (ECB) confirmed that it would maintain the higher pace of purchases under the Pandemic Emergency Purchase Programme (PEPP) in the third quarter. According to ECB’s forward guidance, interest rates will remain durably at or below current levels until inflation reaches the 2 percent target. The ECB released the results of the review of its monetary policy strategy at the beginning of July, in which it set a 2 percent symmetric inflation target. In addition, the ECB also accepted an action plan regarding climate change. As part of this, the ECB will review how to include climate protection considerations in its monetary policy framework in the future.

A number of central banks in the region have indicated recently that they would stand ready to tighten monetary conditions when necessary due to the increase in the outlook for inflation. In the second half of June, the Czech central bank raised its policy rate by 25 basis points, while the central banks of Poland and Romania left policy rates unchanged.

Hungarian economic growth continued in the third wave of the coronavirus pandemic. In May, the performance of industry and construction improved compared with the previous month and a year earlier. The volume of retail sales rose year on year, but it was unchanged relative to the previous month. Real earnings, affecting mostly household consumption, rose further, while wage growth picked up compared with the previous month. The unemployment rate fell and remained at a level considered low by international standards.

The Hungarian economy was restarted in the second quarter, and as a result of the earlier opening than the European average the pace of economic recovery picked up significantly. Real-time data point to double-digit economic growth in the second quarter. Hungarian economic output is expected to recover to pre-crisis levels in the third quarter. The rapid recovery in industry has been followed by construction and retail trade, while the recovery in the service sector, which is most exposed to the pandemic, will take longer.

The historically high investment rate is expected to continue rising on the forecast horizon. Hungarian export performance is expected to improve markedly in 2021 as external markets recover. The increase in the production of new export capacities built in previous years causes a dynamic expansion of exports over the entire forecast horizon. Household demand is likely to pick up gradually. The Hungarian economy is expected to rise by around 6 percent in 2021, by 5.5 percent in 2022 and by 3.5 percent in 2023. According to expectations the economic recovery in Hungary could prove to be one of the fastest compared with other European countries as well.

In June 2021, annual inflation was 5.3 percent, and core inflation stood at 3.8 percent. The consumer price index and core inflation rose by 0.2 percentage points and 0.4 percentage points, respectively, relative to the previous month. Incoming inflation data exceeded the Bank’s projection and market expectations. Since May, the pace of increase in the prices of services and industrial goods has accelerated further. Underlying measures of inflation also increased. Inflation data confirm that inflationary effects, arising from the reopening of the economy, were already strong in June.

Inflation is expected to decline gradually in the coming months, but to stay above the central bank tolerance band until the end of 2021. Inflation is then projected to fall back to the central bank tolerance band again at the beginning of 2022 and to stabilise around the bank target from mid-2022 as a result of the monetary policy tightening cycle.

Upside risks to the outlook for inflation have generally increased. Inflation in the euro area and the US has risen since the beginning of the year. Sustained rises in commodity prices and international freight costs point to a higher external inflation environment. Demand-supply frictions, emerging temporarily due to the rapid restart of the domestic economy, and the renewed tightening of labour market capacities expected in certain sectors, combined with dynamic wage growth, have increased inflation risks.

Following 8.1 percent in 2020, from 2021 the government deficit is expected to decline and, in parallel, the debt-to-GDP ratio to shift to a downward path. The current account surplus and the economy’s net lending are expected to continue rising over the forecast horizon. The decline in Hungary’s net external debt will continue.

In order to ensure price stability, prevent second-round inflationary effects and anchor inflation expectations, the Monetary Council tightened monetary conditions further by several steps in its decision today. According to the July decision, the cycle of interest rate hike continues by 30 basis points. The central bank base rate rises to 1.20 percent. The Monetary Council also considers a 30 basis point increase in the interest rate corridor to be justified. The overnight deposit rate changes to 0.25 percent, and the overnight and one-week collateralised lending rates change to 2.15 percent. The MNB will continue to set the one-week deposit rate at weekly tenders. According to the Monetary Council’s assessment, is warranted to increase the interest rate on the one-week deposit instrument by the same amount as in the base rate.

In parallel with the tightening of interest rate conditions, the Monetary Council continues to phase out the instruments having an effect at longer maturities. With the exhaustion of the available amount, the MNB announced the termination of the FGS Go! in June. As a next step, from today the Bank will discontinue the use of the long-term collateralised lending facility.

The Monetary Council continues to consider the government securities purchase programme to be crucial in its set of monetary policy instruments, which it assesses to be successful during the third wave of the pandemic and in a volatile international financial market environment. 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 the programme by maintaining a lasting presence in the market, taking a flexible approach to changing the quantity and structure of weekly securities purchases, to the extent and for the time necessary.

Through an active market presence, the MNB cushioned the spillover of end-of-quarter 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. It is a key priority for the Bank 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 Monetary Council is committed to maintaining price stability. In the decision-makers’ assessment, risks to the inflation outlook remain on the upside. The Council considers it justified to continue the cycle of interest rate hikes by taking firm steps on a monthly basis to ensure price stability, avoid second-round inflationary effects and to anchor inflation expectations. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target and inflation risks become evenly balanced on the horizon of monetary policy.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 11 August 2021.

MAGYAR NEMZETI BANK

Monetary Council