Press release on the Monetary Council meeting of 20 December 2022

20 December 2022

At its meeting on 20 December 2022, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 21 December 2022:

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.

Over the past quarter, global economic growth has slowed, and GDP has already declined in several countries. Looking ahead, the prolonged Russia-Ukraine war, the energy crisis in Europe and the generally rising interest rate environment continue to present significant uncertainty. Commodity and energy prices have fallen significantly in the past months but remain high relative to previous years.

Global inflation started to moderate slowly in an increasing number of countries. The slowdown in the global economy, weakening demand, falling global energy and commodity prices, as well as lower international freight costs and the easing of difficulties in production chains, point to a continued deceleration in global price increases from 2023.

Investor sentiment has been mixed since the previous interest rate decision. Monetary policy decisions by the world’s leading central banks and developments in the economic outlook were the main factors influencing risk appetite. Developments in the Russia-Ukraine war continue to create significant uncertainties in the CEE region.

The Federal Reserve and the European Central Bank raised interest rates by 50 basis points in December, to a smaller extent than previously. In addition, the ECB announced that it would start reducing the portfolio built under its asset purchase programme from March 2023. In the CEE region, the Polish central bank left interest rate conditions unchanged.

Hungarian economic growth slowed in the third quarter of 2022. In October, industrial production increased on an annual basis, while construction output declined. Retail sales have been growing at a declining pace since March, while sales excluding fuels have already been decreasing. The labour market continues to be tight, and the unemployment rate is low. Overall, annual growth in 2022 has been more favourable than earlier expected, while the high-frequency data point to a further slowdown in GDP growth towards the end of the year.

Growth next year is likely to be slowed by both domestic and external demand factors. The decline in real incomes, rising corporate costs, restrained public investment and the stricter interest rate environment all have a restraining impact on domestic demand. The difficulties affecting international production chains have eased further in recent months; however, the war and the related sanctions continue to create considerable uncertainty. Despite subdued global economic activity, an increase in Hungary’s foreign market share and an improvement in net exports are expected, due to growing domestic export capacities, which is also supported by the dynamic expansion of battery production. Hungary’s GDP is expected to grow by 4.5–5.0 percent in 2022, by 0.5–1.5 percent in 2023, by 3.5–4.5 percent in 2024, and by 3.0–4.0 percent in 2025.

In November 2022, annual inflation was 22.5 percent and core inflation stood at 23.9 percent. The increase in inflation was mainly explained by a pick-up in food price inflation. Inflation expectations continue to be elevated; however, companies’ expectations for retail and services prices have remained below their peak levels seen in the summer.

The termination of the price cap on fuels and higher-than-expected food prices have pushed the inflation path significantly higher than expected in September. From the beginning of 2023, the slowdown in inflation will be supported by both external and domestic factors. The expected moderation in global energy and commodity prices, as well as international freight costs, easing tensions in value chains, and the slowdown in global economic activity are likely to moderate external inflation further. Regarding internal factors, the fading of the base effects of tax measures and the moderating effect on pricing arising from the fall in domestic demand will support a decline in domestic inflation as well. Tight monetary conditions contribute to avoiding second-round inflationary effects and anchoring inflation expectations. Domestic inflation is expected to decrease slowly in the first half of 2023, and then more significantly from the middle of the year. The consumer price index will return to the central bank tolerance band in 2024.

The measures announced by the Government and their implementation are expected to ensure the achievement of this year’s budget deficit target indicated by the Ministry of Finance. Thus, the government debt-to-GDP ratio will decrease to close to 74 percent of GDP by the end of 2022. In the autumn months, the current account deficit started to decrease as gas prices fell and domestic demand adjusted. From 2023, the increasing surplus in items of the current account excluding the energy balance and growing adjustment in the energy market might lead to a rapid improvement. With the normalising global economic environment and terms of trade, as well as with the utilisation of new export capacities built recently, the trade balance will improve significantly, resulting in a further reduction in the current account deficit. The agreement on the Hungarian Recovery and Resilience Facility has significantly reduced uncertainties related to EU funds.

The Monetary Council kept the base rate at 13.00 percent at its meeting today. In addition, the O/N deposit rate and the O/N collateralised borrowing rate were left unchanged at 12.50 percent and 25.00 percent, respectively.

The Monetary Council highlighted two alternative scenarios around the baseline projection in the December Inflation Report. The risk scenario with decelerating global economic activity assumes lower growth and inflation than in the baseline scenario. The scenario that presents the strengthening risk of second-round inflationary effects presumes a higher inflation and slightly higher growth path compared to the baseline scenario.

The current level of the base rate is adequate to manage fundamental inflation risks, while monetary tightening continues with the reduction of interbank liquidity. The MNB held a two-month deposit tender at the end of November to tie up banking sector liquidity over a longer term. Furthermore, from the beginning of December the Bank again has been conducting FX swap tenders providing euro liquidity and discount bill auctions with maturities extending beyond the end of the year. With its active market presence, the MNB increases the effectiveness of monetary policy transmission.

The targeted measures taken by the Bank in mid-October led to an improvement in financial market stability in a rapidly changing risk environment. The one-day deposit quick tenders and FX swap transactions result in tighter interest rate conditions at the short end of the yield curve. In the coming months, the MNB will continue to meet foreign currency liquidity needs to reach market balance related to the energy account.

In the Monetary Council’s assessment, maintaining the current level of the base rate for a prolonged period is required to achieve the price stability objective over the monetary policy horizon. The Council is constantly assessing incoming data and developments in the outlook for inflation and is ready to take appropriate actions if risks increase. The continued use of instruments reducing interbank forint liquidity strengthens the effectiveness of monetary policy transmission in a targeted manner. Looking ahead, maintaining market stability is also key to achieving price stability. In the Monetary Council's view, the agreement on EU funds is a favourable development. However, the MNB still focuses on sustained shifts in financial market conditions, and it will use its instruments introduced in mid-October until a trend improvement in risk perceptions occurs. It is necessary to maintain tight monetary conditions over a prolonged period, which will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 January 2023.

MAGYAR NEMZETI BANK
Monetary Council