Press release on the Monetary Council meeting of 20 June 2023

20 June 2023

At its meeting on 20 June 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 21 June 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.

The global economic outlook continues to be characterised by duality. In 2023, output growth is expected to slow in developed countries. In emerging countries, growth is likely to be similar to last year. In most countries, labour markets are tight. The reversal of energy prices due to supply and demand factors is mitigating the adverse effects of the energy crisis in Europe, which points to an improvement in the outlook for economic activity on the Continent. However, the ongoing Russia-Ukraine war and the persistently high inflation environment are posing downside risks to growth.

Global disinflation has continued. The slowdown in global economic activity, the correction in energy and commodity prices and the fall in international freight costs point to a continued decline in inflation rates. However, core inflation indicators, stuck at a high level, suggest that achieving price stability again may take longer than earlier expected.

Investor sentiment worsened at the beginning of the period, before improving overall since the Monetary Council’s last policy decision. Market turbulence, spilling over to Europe, has eased as the effects of US bank failures waned. In addition, volatility in global financial markets has decreased, mainly due to the conclusion of debates about the US debt ceiling. Oil prices have declined slightly amid high volatility, while European gas prices have risen over the past month. The uncertainty due to the Russia–Ukraine war continues to have a negative impact on investor sentiment.

The Federal Reserve (Fed) kept the target range of the benchmark rate unchanged at its policy meeting in June, while the European Central Bank (ECB) raised its key interest rate by 25 basis points. Based on market expectations, the Fed and the ECB are nearing the end of their tightening cycle; however, further interest rate hikes have been indicated by the two central banks until the end of the year.

In 2023 Q1, Hungary’s GDP declined by 0.9 percent. The performance of industry and construction fell significantly, which was only partly offset by growth in agricultural output and public services. In April, industrial and construction output as well as the volume of retail sales continued to decline. The household confidence indicator remains at a low level. The labour market remains tight, with the unemployment rate standing at 3.9 percent in April.

In 2023, decreasing real wages, rising corporate costs and cautious consumer and investment decisions all contribute to a decline in domestic demand, while net exports support output growth. This year’s economic performance is also improved by the correction in agricultural growth after last year’s drought. Hungary’s GDP is expected to grow by 0.0–1.5 percent in 2023, by 3.5–4.5 percent in 2024 and by 3.0–4.0 percent in 2025.

In May, inflation fell at an increasing pace. Consumer prices rose by 21.5 percent in annual terms, while they fell by 0.4 percent month-on-month, in contrast to the rise seen in recent years. Core inflation stood at 22.8 percent. The consumer price index decreased by 2.5 percentage points compared to April. Inflation slowed across a wide range of products. Within core inflation, price dynamics moderated in most product groups, with only the price index of market services continuing to rise, due to the increase in banking services prices. Inflation expectations of both households and companies fell.

In the coming months, domestic inflation and core inflation will continue to decrease at a rapid pace. During 2023, the disinflationary effect of tight monetary policy, falling global commodity prices, declining domestic consumption and the Government’s measures to strengthen market competition becomes increasingly apparent. Disinflation will continue to accelerate. As a result, inflation may reach single digits by the end of the year. Due to the significant increase in market services prices, core inflation may decrease at a slower pace. The inflation path expected for next year has shifted slightly upwards relative to March due to the Government’s tax measures, and thus the consumer price index may return to the central bank tolerance band in early 2025. Annual inflation may fluctuate between 16.5–18.5 percent in 2023, 3.5–5.5 percent in 2024 and 2.5–3.5 percent in 2025.

The fiscal deficit will continue to decline this year. The budget appropriation for the 2023 deficit is 3.9 percent. Based on the 2024 Budget Act, the accrual-based deficit target is 2.9 percent in 2024 and 1.9 percent in 2025. The government debt ratio is expected to fall from 73.3 percent at the end of 2022 to below 70 percent by the end of 2023, and then below 65 percent by the end of the forecast horizon, driven by economic growth and a declining deficit.

The external balance has continued to improve. In April 2023, the current account was close to balance. The trend-like improvement in the external balance has been driven by a more favourable energy balance and terms of trade, the adjustment of domestic demand and dynamic export growth. This year, the current account deficit is expected to be more favourable than projected in March, being around 2-3 percent of GDP as the trade balance improves. In parallel with the utilisation of new export capacities built recently and a normalising global economic environment, in particular falling energy prices, trade balance and net lending will continue to improve in 2024.

The Monetary Council highlighted three alternative scenarios around the baseline projection in the June Inflation Report. In the scenario presuming faster easing of supply constraints, the settlement of problems facing global supply chains and the decrease in energy and commodity prices will have a stronger impact on domestic production processes, resulting in a lower inflation and higher growth path. The scenario presenting persistently lower consumption is consistent with a lower growth and inflation path. The scenario assuming a persistent increase in inflation expectations presumes a higher inflation path and a somewhat lower growth path compared to the baseline scenario.

In the Monetary Council’s assessment, it is necessary to maintain tight monetary conditions in order to achieve price stability. At today’s meeting, the Council left the base rate unchanged at 13 percent. The current level of the base rate is adequate to manage fundamental inflation risks.

In the Monetary Council’s assessment, the still favourable risk environment has enabled the Bank to continue the normalisation of the interest rate environment. In accordance, the Council decided to reduce the interest paid on optional reserves by 100 basis points, from 17 to 16 percent at today’s meeting, with effect from 21 June. In addition, the O/N collateralised lending rate serving as the top of the interest rate corridor was lowered by 100 basis points to 18.5 percent. According to the Council’s assessment, it is also warranted to reduce the interest rate on the one-day quick deposit tenders and foreign exchange swap tenders by 100 basis points.

In the Monetary Council’s assessment, looking ahead, strengthening monetary policy transmission is also an important factor of achieving price stability. For this reason, the Bank will use the instruments to absorb interbank forint liquidity on a long-term basis in the coming period.

In the Monetary Council’s assessment, maintaining the current level of the base rate will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner. Looking ahead, financial market stability is also key to achieving price stability. In the current environment, a cautious and gradual approach is warranted. The MNB is constantly assessing the effects of international financial market developments on the domestic risk environment, incoming macroeconomic data and developments in the outlook for inflation. If the improvement in risk perceptions persists, the Bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 July 2023.

MAGYAR NEMZETI BANK
Monetary Council