Press release on the Monetary Council meeting of 22 November 2022

22 November 2022

At its meeting on 22 November 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 23 November 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.

The risk of recession in the global economy has increased further due to the prolonged Russia-Ukraine war, the European energy crisis and the generally rising interest rate environment. The effects of the exceptional drought in Europe are expected to push inflation rates up further over the short term; however, signs of an impending turnaround have clearly appeared in commodity markets. Growing recession risks, alongside falling global energy and commodity prices and international freight costs, point to a moderation in global inflation from 2023.

There has been significant volatility in risk appetite over the past month. At the beginning of the period, risk aversion increased in response to monetary policy decisions by the world’s leading central banks and incoming macroeconomic data from Europe and the US, followed by an improvement in risk appetite; however, developments in the war continue to be a source of significant uncertainty in the CEE region. Global prices of most commodities have fallen in recent months but remained at high levels. Oil prices have fallen slightly, while gas prices in European markets have not changed significantly since the previous interest rate decision.

The Federal Reserve and the European Central Bank raised interest rates in line with expectations. In the CEE region, the Czech and the Polish central banks left interest rate conditions unchanged. The Romanian central bank continued its cycle of interest rate hikes.

Hungarian economic growth slowed in 2022 Q3. The country’s GDP grew by 4 percent relative to a year earlier, with industry and market services being the main contributing sectors. By contrast, the significant decline in agricultural output acted as a brake on growth. In September, both industrial production and construction output increased on a year-on-year basis. Retail sales have been expanding at a declining pace since March, while sales excluding fuels have been weakening since July. The labour market continues to be tight, and the unemployment rate is low. The economic slowdown and the effects of high energy prices are increasingly reflected in a general deterioration in sentiment indicators.

The components of domestic demand are expected to be the main contributors to growth throughout this year. In 2023, growing precaution and a higher level of energy and food prices than before will cause household consumption to decrease. Rising costs and more uncertain demand prospects may induce companies to postpone investments, while the rescheduling of public development projects will also restrain investment activity. Net exports are expected to make a positive contribution to GDP growth again from the end of 2023 as external markets and supply chains recover. Hungary’s GDP is expected to grow by 3.0–4.0 percent in 2022, by 0.5–1.5 percent in 2023, and by 3.5–4.5 percent in 2024.

In October 2022, annual inflation was 21.1 percent and core inflation stood at 22.3 percent. The increase in inflation was mainly explained by a pick-up in food price inflation. The rate of core inflation excluding processed food prices rose relative to September but continued to be below the excessively high levels of the summer months. Inflation expectations continue to be elevated; however, companies’ expectations for retail and services prices have remained below their peak levels seen in the summer.

In recent months, inflation in Hungary was mainly driven by items outside the scope of monetary policy. As a result of the exceptional drought and the pass-through of high energy prices, inflation will rise further at a declining pace in the coming months. The easing in external inflationary pressures and in the cost shocks from freight costs and commodity prices, the slowdown in global economic growth and the downward pressure on prices, resulting from shrinking domestic demand, are expected to become more pronounced in the development of domestic prices from early 2023, leading to a gradual turnaround in inflation. Tight monetary conditions contribute to avoiding second-round inflationary effects and anchoring inflation expectations. There are symmetric risks to the outlook for inflation. The consumer price index may average between 13.5–14.5 percent in 2022. Domestic inflation will 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 the first half of 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 76 percent of GDP by the end of 2022. The current account deficit started to decline in the autumn months, in parallel with the decline in gas prices and the adjustment in domestic demand; however, it is expected to continue rising temporarily in 2022, due to the import-increasing effect of high energy prices. Subsequently, 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 supported by the decrease in energy prices. By 2024, with the normalisation of the global economic environment and the pick-up of the production of significant new export capacities built in recent years, the external balance position is expected to improve significantly.

In line with its previous communication, 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 current level of the base rate is adequate to manage fundamental inflation risks, while monetary policy tightening continues with the reduction of interbank liquidity. The MNB will hold 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 will again hold 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 will further increase 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. The MNB meets directly major foreign currency liquidity needs arising from covering net energy imports over the period to the end of the year, while the Bank continuously takes into account considerations regarding the adequacy of foreign currency reserves, looking ahead as well. In recent months, domestic economic agents have begun to adjust to the energy market through a decline in energy consumption. This, along with a fall in energy prices, allows to maintain balance in the foreign exchange market by providing less foreign currency liquidity than earlier expected.

In the Monetary Council’s assessment, maintaining the current level of the base rate for a prolonged period is consistent with the achievement of the price stability objective over the monetary policy horizon. The instruments absorbing forint liquidity, announced for the end of the year, improve further the effectiveness of monetary policy transmission. Maintaining market stability in a rapidly changing risk environment continues to be crucial to achieving price stability. The MNB 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. Tight monetary conditions will be maintained 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 7 December 2022.

MAGYAR NEMZETI BANK
Monetary Council