Press release on the Monetary Council meeting of 19 December 2023

19 December 2023

At its meeting on 19 December 2023, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 20 December 2023:

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.

In 2023 Q3, economic growth slowed in the EU and China, while it accelerated in the US. The short-term economic outlook is exposed to downside risks, which is further exacerbated by the generally tense geopolitical situation.

In the euro area, inflation was below expectations at 2.4 percent in November, approaching the inflation target. In the US, the pace of price increases also continued to moderate. Global trends point to continued disinflation. Weakening global economic demand, lower commodity prices compared to the previous year and the correction in international freight costs suggest a continued decline in inflation rates. However, core inflation indicators, falling at a slower pace, suggest that achieving persistent price stability again is expected to be a protracted process in general.

International risk appetite has increased since the November policy decision. Sentiment in global financial markets was influenced by expectations for the monetary policies of the world’s leading central banks, incoming macroeconomic data and developments related to the Gaza conflict. The Federal Reserve and the European Central Bank left their policy rates unchanged at their rate-setting meetings in December. Based on market pricings, both central banks’ interest rates have peaked, and looking ahead, expectations for the beginning of interest rate cuts in 2024 strengthened. Central banks in the CEE region left their policy rates unchanged in the month.

Hungary’s economic fundamentals continued to improve. The recession ended in 2023 Q3. Hungary’s GDP rose by 0.9 percent compared to the previous quarter, and it fell by 0.4 percent in annual terms. The main contributor to the downturn in economic performance relative to the previous year has been the fall in industrial output and market services, while agricultural performance has moderated the decline. The improvement in the household confidence indicator slowed in the autumn months. Accompanied by a high level of employment, the labour market remains tight, the unemployment rate is low even by EU standards.

The gradual economic recovery has continued in 2023 Q4. The downturn in domestic economic performance throughout this year was primarily caused by high inflation. Household consumption fell due to high inflation and increased caution. Investment growth was restrained by the cancellation of government development projects, in addition to the more uncertain outlook for demand. Net exports made a positive contribution to economic growth in 2023. As inflation moderates, real wages rise substantially and confidence gradually recovers, leading to an increase in domestic demand, more balanced and stronger economic growth is expected even by EU standards in 2024. Subdued European economic activity is holding back domestic exports, but with the pick-up in the production of new export capacities built recently, Hungary’s export market share is expected to increase further over the entire forecast horizon. In our projection, Hungary’s economic performance may be in the range of (-0.6)–(-0.4) percent in 2023. Economic performance is projected to increase by 2.5–3.5 percent in 2024, by 3.5–4.5 percent in 2025, and by 3.0–4.0 percent in 2026.

The widespread and general decline in domestic inflation continued at a rapid pace in November. Consumer prices rose by 7.9 percent in annual terms. Core inflation stood at 9.1 percent. The consumer price index fell significantly by 2.0 percentage points, while core inflation declined by 1.8 percentage points from the previous month. The continued slowdown in underlying inflation is indicated by the fact that the annualised three-month change in core inflation was below 3 percent in November as well.

In the coming months, domestic CPI inflation and core inflation will continue to decrease. Disciplined monetary policy, the Government’s measures to strengthen market competition and subdued domestic demand combined with a significantly lower external cost environment than last year support a further moderation in price growth. Inflation fell from above 25 percent at the beginning of the year at one of the fastest paces in Europe, and domestic inflation is expected to fall to around 6.0 percent, a level corresponding to the region’s average, by the end of 2023. Strong disinflation is expected to continue in 2024 Q1, before slowing down, and thus the consumer price index is likely to return to the central bank inflation target persistently in 2025. Annual inflation may be between 17.6 and 17.7 percent in 2023, between 4.0 and 5.5 percent in 2024 and between 2.5 and 3.5 percent in 2025 and 2026.

The rapid and substantial improvement in the external balance continued. The monthly current account balance was in surplus in October 2023 as well. The sustained improvement in the external position reflects shrinking imports caused by significantly lower energy prices and the adjustment of energy consumption on the one hand, and by the decline in domestic demand on the other. Goods exports were supported by a decrease in inventories, while the services balance also developed favourably. The utilisation of new export capacities built recently and the improving global economic environment are expected to give new impetus to exports in the coming years. The current account balance-to-GDP ratio is likely to improve by over 8 percentage points in 2023, a stronger improvement than seen after the financial crisis. In 2023, the annual current account balance is expected to turn slightly positive. The current account balance is expected to continue rising over the forecast horizon.

As a result of the negotiations on the EU funds, the drawdown of Cohesion Funds for the period between 2021 and 2027 may start. The agreement will improve Hungary’s risk perception and net lending. In addition, incoming funds will have a favourable effect on the government debt path.

In our projection, the government deficit may be between 5.2 percent and 6.0 percent of GDP in 2023, between 2.9 percent and 3.9 percent in 2024, between 1.9 percent and 2.9 percent in 2025 and between 1.4 percent and 2.4 percent in 2026. There are risks to meeting the deficit targets over the entire forecast horizon. The government debt ratio may fall to around 73 percent of GDP in 2023, followed by a further decline over the forecast horizon.

The Monetary Council highlighted three alternative risk scenarios around the baseline projection in the December Inflation Report. Both economic growth and inflation may be lower compared to the baseline in the scenarios that assume deceleration in global economic activity and a slower recovery in consumption. However, possible capital outflows from emerging markets are consistent with a higher inflation path.

Hungary’s economy is clearly on a path of disinflation, while risk perceptions have improved further. According to the Monetary Council, this allows the base rate to continue to be lowered. In line with this, at its meeting today the Monetary Council cut the base rate by 75 basis points to 10.75 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 9.75 percent, while the upper bound, i.e. the O/N lending rate, will be lowered to 11.75 percent. The positive real interest rates support the continuation of disinflation. As inflation approaches the central bank tolerance band, real interest rates are expected to decline.

Risks surrounding global disinflation and volatility in international investor sentiment warrant a careful approach to monetary policy. The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment. In the coming months, decisions on any further reductions in the base rate and their optimal pace will be made on the basis of this information, in a data-driven manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 January 2024.

MAGYAR NEMZETI BANK
Monetary Council