Press release on the Monetary Council meeting of 21 November 2023

21 November 2023

At its meeting on 21 November 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 22 November 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.

Heightened geopolitical tensions are posing increased risks to the outlook for the global economy in general. In 2023 Q3, economic growth slowed in the EU and China, while it accelerated in the US. However, the short-term economic outlook is exposed to downside risks. The persistently high inflationary environment and the ongoing Russia-Ukraine war have been a source of significant uncertainty to the outlook for economic activity globally, and particularly in Europe. In the meantime, the escalation of the situation in Gaza has contributed to the increase in geopolitical tensions.

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, volatility in commodity prices has persisted, continuing to pose a risk to inflation. Core inflation indicators, falling at a slower pace, suggest that achieving price stability again is expected to be a protracted process in general.

International risk appetite has been volatile since the September policy decision. Sentiment in global financial markets was significantly influenced by expectations for the monetary policies of the world’s leading central banks and incoming macroeconomic data. In addition, continuing geopolitical tensions raised uncertainty. Based on market expectations, the Federal Reserve’s and the European Central Bank’s interest rates may have peaked; however, monetary conditions will remain tight for a prolonged period, according to communication from both central banks. Central banks in the CEE region left their policy rates unchanged in the month.

In 2023 Q3, Hungary’s GDP declined by 0.4 percent in annual terms, but rose by 0.9 percent compared to the previous quarter, indicating that the recession has ended. Based on preliminary data, the main contributor to the downturn in domestic economic performance has been the decline in industrial output and market services, while agricultural performance has moderated the decline. The household confidence indicator improved slightly in October. In September, industrial production, construction output and retail sales fell in annual terms. By contrast, vehicle production, accounting for the largest share of industrial production, increased. The labour market remains tight, and the unemployment rate is low.

In 2023, subdued economic performance has mainly reflected high inflation and declining government investment. Cautious consumer and investment decisions have led to a decline in domestic demand. However, this year’s economic performance is expected to be improved significantly by the correction in agricultural production after last year’s drought. The real wage index, increasing since September, is also expected to contribute to a slow pick-up in performance towards the end of the year. Net exports are expected to make a positive contribution to economic growth in 2023. Declining inflation and the recovery in domestic demand components are likely to support GDP growth in 2024 and 2025. With the pick-up in the production of new export capacities built recently, Hungary’s export market share is expected to increase further. In our projection, in 2023, Hungary’s economic performance is expected to be in the lower half of the range provided in the September Inflation Report. In 2024 and 2025, Hungary’s GDP is expected to expand by 3.0–4.0 percent.

The widespread and general decline in domestic inflation continued in October. Consumer prices rose by 9.9 percent in annual terms, and, as a result, the rate of price increases fell back into single-digit territory again, nine months after the peak in inflation at the beginning of the year. Core inflation stood at 10.9 percent. The consumer price index was significantly lower, by 2.3 percentage points, than the September value, primarily reflecting the slowdown in the price dynamics of food and fuel. Core inflation slowed across a wide range of products and services, so the indicator declined by 2.2 percentage points from the previous month. The three-month annualised change in core inflation, an indicator better capturing underlying inflation in the current situation, fell below 3 percent. Recent monthly repricings reflected in inflation and core inflation were below the historical average for October. The October data on both inflation and core inflation were in the more favourable lower half of the forecast range provided in the September Inflation Report.

In the coming months, domestic CPI inflation and core inflation will continue to decrease. Tight monetary policy, the downward pressure on prices from the Government’s measures to strengthen market competition, lower commodity prices compared to the previous year and subdued domestic demand are expected to have an increasingly broad-based strong disinflationary effect. Annual inflation is expected to be around 7 percent at the end of the year. The consumer price index is expected to return to the central bank tolerance band in 2025. Annual inflation may fluctuate between 17.6–18.1 percent in 2023, between 4.0–6.0 percent in 2024 and between 2.5–3.5 percent in 2025.

Due to the less favourable macroeconomic developments than expected and the increase in expenditures, the Government raised the ESA deficit target for the 2023 budget to 5.2 percent in October. The government debt ratio is expected to fall from 73.9 percent at the end of 2022 to nearly 71 percent by the end of 2023.

There has been a rapid and substantial improvement in the external balance. The current account was in significant surplus in September 2023. The trend-like improvement in the external balance position has been driven by significantly lower energy prices compared to the previous year, the adjustment of energy consumption, shrinking import intensity due to subdued domestic demand, and growing vehicle and battery industry exports. From 2024, the favourable external balance position is expected to persist, reflecting the utilisation of new export capacities built recently and a normalising global economic environment. Overall, the current account deficit is expected to fall below 1 percent of GDP in 2023, with the balance expected to improve further over the forecast horizon.

Strong disinflation and the stability of financial markets allow the MNB to continue shaping monetary conditions by lowering the base rate. At the same time, external risks continue to warrant a cautious approach. In line with this, at its meeting today the Monetary Council cut the base rate by 75 basis points to 11.50 percent. Accordingly, the lower bound of the interest rate corridor, the O/N deposit rate, will be reduced to 10.50 percent, while the upper bound, the O/N lending rate, will be reduced to 12.50 percent. With disinflation accelerating, the domestic real interest rate has risen further. The positive real interest rate supports the further decline in inflation.

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, and it will take decisions on additional changes in monetary conditions based on these factors in the coming months.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 December 2023.

MAGYAR NEMZETI BANK
Monetary Council