Press release on the Monetary Council meeting of 30 August 2022

1. August 2022

At its meeting on 30 August 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 31 August 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 Russia-Ukraine war, a possible new wave of Covid-19, high commodity prices and ongoing disruptions in supply chains are increasing recession risks in the global economy which are also exacerbated by a deterioration in confidence indicators. The effects of persistently high commodity and energy prices and the drought in Europe are increasing external inflationary effects further in the coming months; however, from 2023 onwards, global inflation is expected to fall alongside commodity and energy prices as economic growth declines.

Investor sentiment has been volatile. 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, fears of recession and developments related to the coronavirus pandemic. In the first half of 2022, global prices of several commodities reached historic highs and then started to decline recently. However, they remained at high levels. Gas and electricity prices continued to rise significantly in European markets.

The Federal Reserve raised interest rates by 75 basis points at the end of July. In the CEE region, the Czech central bank did not raise its base rate any further in August, while the National Bank of Romania increased its key policy rate by 75 basis points.

In the first half of 2022, the Hungarian economy grew strongly: GDP rose by 6.5 percent in the second quarter of 2022 relative to a year earlier. All sectors of the national economy contributed to economic growth, except for the agricultural sector. In June, industrial output continued to grow on an annual basis, while the volume of construction activity decreased. Following strong growth at the beginning of the year, the turnover of retail stores has been gradually declining since April. The labour market continues to be tight, and the unemployment rate remains low. High-frequency data indicate a clear slowdown in economic growth since the beginning of June. The global economic slowdown and the effects of high energy prices are increasingly reflected in the general deterioration of sentiment indicators.

The time profile and structure of domestic GDP growth has 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. Components of domestic demand, particularly household consumption, are expected to contribute to growth throughout this year. By contrast, net exports are likely to hold down the expansion. Looking forward, consumption and investment dynamics are expected to slow considerably, while net exports are expected to make a positive contribution to GDP growth again as external markets and supply chains recover.

In July 2022, annual inflation was 13.7 percent and core inflation stood at 16.7 percent. Inflation rose by 2.0 percentage points mainly due to an increase in the prices of food, manufactured goods and alcohol and tobacco products. Almost half of the monthly price change was caused by the rise in food prices. Producer prices continue to rise rapidly and feed through to a broad range of consumer prices. Inflation expectations are at a high level.

In the autumn months, similarly to the developments in the global inflation environment, inflation is expected to rise further in Hungary. The exceptional drought, the price explosion in the energy market and changes in official energy price regulations have all contributed to the rise in consumer prices. However, increasing fears of global recession and the resulting fall in commodity prices are expected to reduce external inflationary effects from the end of the year. In terms of achieving the inflation target, it is still crucial to avoid second-round effects and to anchor inflation expectations in the medium term.

The significant cash-based surplus of the central sub-sector of general government amounted to more than HUF 250 billion in July 2022. The measures announced by the Government and their implementation are expected to ensure that the fiscal objectives will be met this year and next. As a result of economic growth and the declining deficit, the government debt-to-GDP ratio may fall from 76.7 percent at the end of the previous year to below 75 percent in 2022, followed by further declines of around 2.5 percentage points each year. The current account deficit is expected to rise further temporarily in 2022. The deterioration in the trade balance this year is likely to reflect a worsening in the terms of trade due to high energy prices, the slowdown in external markets, and imports in connection with buoyant domestic demand. However, significant new export capacities have been built in recent years, and as their production picks up, the external balance is expected to improve quickly.

In the Monetary Council’s assessment, it is warranted to tighten the base rate further in a decisive manner in order to anchor inflation expectations and mitigate second-round inflation risks. The MNB continues to stand ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by the rise in short-term risks in financial and commodity markets.

According to today’s decision of the Monetary Council, the central bank base rate was raised by 100 basis points to 11.75 percent. The overnight deposit rate was increased by 100 basis points to 11.25 percent, and the overnight and the one-week collateralised lending rates were increased by 100 basis points to 14.25 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 Bank considers it crucial that short-term rates in every sub-market, particularly in the swap market, and at all times develop consistently with the level of interest rates deemed optimal by the Monetary Council. Therefore, the MNB has held swap tenders providing foreign currency liquidity since the beginning of July on a daily basis. With an active presence in the market, swap tenders improved the effectiveness of monetary policy transmission through an increase in swap rates, thereby supporting the achievement and maintenance of price stability.

To enhance monetary transmission further, the Monetary Council decided to introduce three measures which will support the development of short-term financial market interest rates consistently with the Bank’s policy stance in a turbulent period in financial markets by draining interbank liquidity from this autumn. The Bank will raise the required reserve ratio set for the banking system. Additionally, central bank discount bill auctions will be announced and held regularly. The Bank will also introduce a long-term deposit instrument in order to sterilise liquidity in the banking system at longer maturities than currently.

The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle. The MNB continuously monitors developments in financial market risks as well and stands ready to intervene in a decisive manner using every instrument in its monetary policy toolkit, if necessary. Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target in a sustainable manner 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 14 September 2022.

MAGYAR NEMZETI BANK
Monetary Council