Press release on the Monetary Council meeting of 31 May 2022

31 May 2022

At its meeting on 31 May 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 1 June 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 fundamentally changed the geopolitical situation and the global economic outlook. Due to the geographical proximity and a large share of trade with the two parties involved, the events have a strong effect in Europe, especially in the Central and Eastern European region. Reaching decade highs, inflation continued to rise in a number of countries and fluctuated in double-digit territory. The war has raised inflation through higher commodity and energy prices, which has been aggravated by ongoing supply disruptions.

Global investor sentiment has been volatile since the Council’s previous interest rate decision. 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. Major commodity prices remain high. Global oil prices rose over the past month.

In response to high inflation becoming increasingly persistent, the world’s leading central banks have tightened their monetary policy stance even amidst deteriorating prospects for economic growth in recent months. In line with expectations, the Fed continued to raise its policy rate in May and decided to start reducing its balance sheet in June. In April, the European Central Bank decided to cease its asset purchase programme (APP) in the third quarter of 2022. In the CEE region, the Czech, Polish and Romanian central banks continued to raise their key policy rates.

According to preliminary data, Hungarian GDP rose by 8.2 percent in the first quarter of 2022 on a year earlier and by 2.1 percent on the fourth quarter of 2021. Despite the war situation, Hungarian economic growth continued to be strong, to which nearly all sectors of the national economy contributed. In March, industrial production and construction output continued to grow on an annual basis. The value of retail sales rose at a double-digit rate in March relative to a year earlier. The labour market remains tight and the unemployment rate continues to be low.

The Hungarian economy has a strong ability to grow. The short-term economic outlook has been driven by the consequences of the war and the policy of sanctions implemented as well as by the Government’s responses to this extraordinary situation. The dual nature of economic growth is expected to persist in the coming period. Strong domestic demand may partly offset the adverse effects of the Russia-Ukraine war on growth. Based on real time data, strong growth at the beginning of 2022 is expected to persist in the second quarter; however, looking ahead, a slowdown is expected due to subdued growth in external markets, the increasingly uncertain economic outlook, and high energy prices.

In April 2022, annual inflation was 9.5 percent and core inflation stood at 10.3 percent. Food prices continued to exhibit a double-digit increase relative to the period a year earlier. There were significantly greater-than-usual repricings in April as well, with food prices accounting for nearly a half. External, cost-side effects continue to quickly feed through to consumer prices, and as a result they have been a major factor driving short-term inflation developments. The Government’s measures affecting fuel, certain essential food products and residential energy prices significantly cushion the spillover of the increase in global commodity prices into domestic inflation. Inflation expectations remain elevated.

Strong negative supply effects are expected to raise inflation and core inflation further in the coming months. Rises in food prices are likely to play a central role in the increase. The inflation rate is expected to decline gradually from the autumn months.

At the end of the first quarter of 2022, data on general government in the MNB’s preliminary financial accounts suggest that the Hungarian debt-to-GDP ratio rose to 77.3 percent, exceeding a level of 76.6 percent at the end of 2021. The measures announced by the Government will contribute to the achievement of fiscal objectives this year and next. The current account deficit also rose in the first quarter. Weak external demand due to the war on the export side and high energy prices on the import side both point to a deterioration in the trade balance in 2022.

The uncertainty surrounding the international environment has been elevated by developments in the Russia-Ukraine war and expectations about the world’s leading central banks’ monetary policies, which has posed a much higher risk than usual to the outlook for inflation. In the current environment, the Monetary Council deems it necessary to continue the tightening of monetary conditions and to gradually continue the base rate tightening cycle in order to anchor inflation expectations and mitigate second-round inflation risks. In the coming quarters, a key task for monetary policy is to set an optimal interest rate level that ensures the sustainable achievement of the inflation target.

According to today’s decision of the Monetary Council, the central bank base rate was raised by 50 basis points to 5.90 percent. The overnight deposit rate was increased by 50 basis points to 5.90 percent, and the overnight and the one-week collateralised lending rates were increased by 50 basis points to 8.90 percent. 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 short-term risks in financial and commodity markets. The MNB will continue to set the one-week deposit rate at weekly tenders; however, the central bank normally determines the one-week deposit rate on a monthly basis. The base rate will gradually catch up to the level of the one-week deposit rate evolving in the coming months.

The Bank continues to place great emphasis on ensuring that short-term rates in every sub-market, particularly in the swap market, and at all times develop consistently with the level of short-term rates deemed optimal by the Monetary Council. To that end, the MNB will actively use its swap instrument providing foreign currency liquidity again from the beginning of June. By maintaining an active presence in the market and managing tensions potentially emerging in swap markets at the end of the quarter, the Bank strengthens the effectiveness of monetary policy transmission and thereby supports the return to price stability and its maintenance.

The increase in global uncertainty, fundamental inflation risks and the setting of an optimal interest rate level in terms of the sustainable achievement of the inflation target warrant the gradual continuation of the base rate tightening cycle. The MNB continuously monitors developments in financial market risks as well and stands ready to intervene in a flexible 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 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 15 June 2022.

MAGYAR NEMZETI BANK
Monetary Council