Press release on the Monetary Council meeting of 23 May 2023

23 May 2023

At its meeting on 23 May 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 24 May 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 Russia-Ukraine war and the persistently high inflation environment are posing downside risks to growth. The reversal of energy prices and the high level of gas storage facilities are mitigating the adverse effects of the energy crisis in Europe, which points to an improvement in the outlook for economic activity on the Continent.

The turnaround in inflation has been emerging in an increasing number of countries in the world. The slowdown in global economic activity, the correction in energy and commodity prices and the fall in international freight costs point to continued global disinflation. However, the slow change in the trend of core inflation suggests that the normalisation of inflation might take longer than earlier expected.

Investor sentiment has improved since the Monetary Council’s last policy decision. As a result of a US bank failure in early May, concerns about certain participants of the global banking system have increased again; however, market turbulence has proved to be temporary. Market participants’ attention was focused on expectations for interest rate policies of the world’s leading central banks, the US debt ceiling, and macroeconomic data releases, in addition to the events relating to the bank failure.

Both the Federal Reserve (Fed) and the European Central Bank (ECB) raised their policy rates by 25 basis points. Based on market expectations, the Fed is nearing the end of its tightening cycle while the ECB may raise its policy rate further in a few more steps. In line with expectations, central banks in the CEE region have not changed monetary conditions.

Hungary’s GDP fell in the first quarter of 2023. Based on preliminary data, Hungary’s GDP declined by 0.9 percent year on year, with weakness in industrial output being the main contributing factor, as the decline was partly offset by the performance of agriculture and services. The household confidence indicator remains at a low level. The labour market remains tight, and the unemployment rate is low.

The time profile and structure of domestic GDP is expected to be characterised by duality this year. Output growth will be weighed down mainly by domestic demand factors, while export sales will continue to grow steadily. Economic growth is expected to pick up again from the second half of the year as inflation declines markedly and investment recovers. Both internal and external factors may make a positive contribution to growth in 2024. 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 April, inflation continued to decline at a faster rate than previously. Annual inflation was 24.0 percent and core inflation stood at 24.8 percent. The consumer price index fell by 1.2 percentage points compared to the previous month. A slowdown in inflation was seen across a wide range of products. The fall in core inflation primarily reflected a fall in processed food price inflation. Market services are still characterised by significant monthly price increases. Inflation expectations of both households and companies fell.

Tight monetary conditions have broader disinflationary effects. The consumer price index is expected to continue to decrease at an accelerating pace in the next months, which will also be strongly supported by the growing impact of base effects from the middle of the year. The consumer price index will return to the central bank tolerance band in 2024. Inflation is projected to be 15.0–19.5 percent in 2023, 3.0–5.0 percent in 2024 and 2.5–3.5 percent in 2025.

The fiscal deficit will continue to decline this year. The deficit is projected to be 3.9 percent in 2023. The government debt ratio may fall to 69 percent in 2023 and to close to 65 percent by the end of 2025.

The external balance continued to improve. After two years, the current account balance turned positive again in March 2023. The trend-like improvement in the external balance has been driven by a decrease in the energy balance, more favourable terms of trade, the adjustment of domestic demand and the dynamic growth of exports. The current account deficit is expected to decline to a level between 3 percent and 4 percent this year. In parallel with a normalising global economic environment and the utilisation of new export capacities built recently, the trade balance and net lending will continue to improve in 2024.

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.

There has been a sustained and significant improvement in domestic financial market stability recently, driven by external and internal factors. The turmoil in developed economies’ banking systems observed in recent months has had no global spillover effects. Investor sentiment towards emerging economies has widely improved. The risk of a European energy crisis has decreased, while there has been a strong and trend-like improvement in Hungary’s current account balance. The capital and liquidity positions of domestic banks are stable.

In the Monetary Council’s assessment, the persistent improvement in risk perceptions has enabled the Bank to take additional steps towards 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 18 to 17 percent at today’s meeting, with effect from 24 May. In addition, the O/N collateralised lending rate serving as the top of the interest rate corridor was lowered by 100 basis points to 19.5 percent. According to the Council’s assessment, it is 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, it is necessary to maintain the current level of the base rate over a prolonged period, which 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 incoming data and developments in the outlook for inflation, and is closely monitoring the effects of international financial market developments on the domestic risk environment. 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 7 June 2023.

MAGYAR NEMZETI BANK
Monetary Council