Press release on the Monetary Council meeting of 27 September 2022

27 September 2022

At its meeting on 27 September 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 28 September 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 due to the prolonged Russia-Ukraine war and the European energy crisis. High commodity prices and the drought in Europe may push inflation up further over the short term; however, the first signs of a turnaround have appeared. Growing recession risks, alongside falling commodity and energy prices and transport costs, points to a moderation in global inflation from 2023.

Investor sentiment has deteriorated in general. Risk appetite has been driven by news on the war, expectations for interest rate increases by the world’s leading central banks, concerns caused by persistently high inflation and fears of recession. Global prices of most commodities have fallen recently but remained at high levels. Gas futures prices have fallen since September, exhibiting considerable volatility. The US dollar continued to appreciate against the currencies of both developed and emerging economies.

Both the Federal Reserve and the European Central Bank raised interest rates by 75 basis points in September. Meanwhile, CEE central banks have begun to slow or halt their cycle of interest rate hikes started well before those of the world’s leading central banks. The Polish central bank raised its base rate by 25 basis points in September and rendered additional steps conditional upon incoming data. The Czech central bank stopped tightening interest rate conditions in August, and the Romanian central bank raised its policy rate by 75 basis points, by a lesser extent than expected by the market.

In the first half of 2022, the Hungarian economy grew strongly; however, high-frequency data indicate a clear economic slowdown since the beginning of June. Industrial production and construction output increased on a year-on-year basis in July. Retail turnover stagnated after monthly decreases experienced since April. The labour market continues to be tight. However, the global economic slowdown and the effects of high energy prices are increasingly reflected in a general deterioration in sentiment indicators.

The time profile and structure of domestic GDP growth have been characterised by strong duality in 2022. The rate of annual economic growth is likely to slow significantly in the second half of the year. The components of domestic demand are expected to contribute to growth throughout this year. By contrast, net exports are likely to hold back the expansion. In 2023, household consumption will decrease. Rising costs and more uncertain demand prospects will reduce corporate 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 August 2022, annual inflation was 15.6 percent and core inflation stood at 19.0 percent. Inflation rose by 1.9 percentage points, mainly due to an increase in food prices. Processed food prices were the main contributing factor to the increase in core inflation. The rise in producer prices has almost completely passed through to retail prices. Inflation expectations are at elevated levels.

Inflation is expected to rise further in the autumn months, mainly due to factors outside the scope of monetary policy. The exceptional drought, the price explosion in energy markets and changes in official energy price regulations have all caused a short-term rise in inflation. The extension of measures aimed at capping prices until 1 January 2023 is likely to restrain price increases until the end of the year.

The easing of external inflationary pressures and the downward pressure on prices, resulting from slowing demand, is expected start feeding through to domestic inflation from early 2023, leading to a slow turnaround in price growth. The expected decline in freight costs, commodity and energy prices based on futures prices, as well as the slowdown in global economic growth will all have a downward effect on external inflation. At the same time, declining consumer demand has an increasingly strong constraining effect on companies’ pricing decisions. Tight monetary conditions help to avoid second-round inflationary effects and anchor inflation expectations. 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 is expected to continue rising temporarily in 2022 due to the import-increasing effect of high energy prices. Apart from the deterioration of the energy balance, an overall improvement can be observed in other items of the balance of payments. 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 rapidly and significantly.

The Monetary Council reviewed real economic and financial market developments, as well as the past and potential future outcomes of the cycle of interest rate hikes. Based on these, the Council decided to make a decisive interest rate step in September.

According to today’s decision of the Monetary Council, the central bank base rate was raised by 125 basis points to 13.00 percent. The overnight deposit rate was increased by 125 basis points to 12.50 percent, and the overnight and the one-week collateralised lending rates were increased by 125 basis points to 15.50 percent. According to the Monetary Council’s assessment, it is warranted to increase the interest rate on the one-week deposit instrument by the same measure as in the base rate.

The Magyar Nemzeti Bank was among the first institutions to start the tightening of monetary conditions, raising the base rate by over 12 percentage points since June 2021. With this, interest rate conditions have become sufficiently strict. The tightening of monetary conditions continues with the tightening of liquidity.

From October 1, the MNB will significantly reduce forint liquidity by raising the required reserve ratio, holding central bank discount bond auctions regularly and launching a longer-term deposit instrument. In addition, the MNB also increases the effectiveness of monetary transmission through increases in swap yields using tenders providing foreign currency liquidity held on a daily basis. These measures will tighten monetary conditions even further, so the disinflationary effect of the previous base interest rate hikes will increase considerably.

The Monetary Council deems that the risk distribution around the inflation projection of the September Inflation Report has become symmetrical. The alternative scenarios assuming the possibility of slowing global economic activity and a larger reversal in energy and commodity prices imply lower inflation than the baseline, and the scenarios assuming energy and commodity prices remaining at higher levels and strengthening second-round inflationary effects point to higher inflation. Overall, the growth risks point to a lower GDP trajectory.

In the Monetary Council’s assessment, by the current level of the base rate, interest rate conditions have become sufficiently strict, which ensures the achievement of the inflation target. The Monetary Council has decided to stop the cycle of base rate hikes after the step in September. 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. Looking ahead, tightening liquidity and further enhancing monetary transmission will be in the MNB’s focus, for which the central bank may decide on additional measures in the future.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 October 2022.

MAGYAR NEMZETI BANK
Monetary Council