Press release on the Monetary Council meeting of 24 January 2023

24 January 2023

At its meeting on 24 January 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 25 January 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.

Over the recent period, global economic growth has slowed and GDP has already declined in several countries. Looking ahead, the prolonged Russia-Ukraine war, the energy crisis in Europe and the generally rising interest rate environment continue to present significant uncertainty. Commodity and energy prices have fallen significantly in the past months but remain high relative to previous years.

Inflation has started to moderate slowly in an increasing number of countries. Weakening demand, falling energy and commodity prices, as well as lower international freight costs and the easing of difficulties in production chains, point to a continued fall in global inflation from 2023.

Investor sentiment has improved slightly since the last interest rate decision. Risk appetite has been mainly influenced by macroeconomic data releases, the economic outlook and expectations related to the monetary policy of the world’s leading central banks. Developments in the Russia-Ukraine war continue to create significant uncertainties.

According to both market pricing and decision makers’ communications, the Federal Reserve and the European Central Bank are expected to raise interest rates further. In addition, based on its earlier announcement, the ECB would start reducing the portfolio built under its asset purchase programme from March 2023. In the CEE region, the Romanian central bank raised its policy rate by 25 basis points. By contrast, the Czech and the Polish central banks left interest rates unchanged.

High frequency data suggest a further slowdown in GDP growth by the end of 2022. In November, the volume of retail sales excluding fuel sales declined. Industrial production growth slowed. The outlook for production activity improved in the past month; however, confidence indicators remained at low levels. The labour market continues to be tight, and the unemployment rate is low.

The pace of growth this year is likely to be slowed by both domestic and external demand factors. The decline in real incomes, rising corporate costs, delayed public investment and the stricter interest rate environment all have a restraining impact on domestic demand. Despite subdued global economic activity, Hungary’s foreign market share is expected to increase due to growing domestic export capacities, which is also supported by the dynamic expansion of battery production. According to the December Inflation Report projection, Hungary’s GDP increased by 4.5–5.0 percent in 2022 before rising 0.5–1.5 percent this year, by 3.5–4.5 percent in 2024 and by 3.0–4.0 percent in 2025.

In December 2022, annual inflation was 24.5 percent and core inflation stood at 24.8 percent. The increase in inflation was entirely accounted for by a pick-up in fuel prices. The incoming data fell short of expectations, which was attributable in part to subdued energy consumption due to the weather, in addition to the slight decline in unprocessed food price inflation. Inflation expectations continue to be elevated; however, companies’ expectations for retail and services prices have remained below their peak levels seen in the summer.

The effects causing a turnaround in inflation are expected to strengthen in the coming months. Global energy, commodity and food prices have fallen to the levels seen before the Russia-Ukraine war. In addition, the moderating effect on pricing arising from the fall in domestic demand and, from the spring months, the fading of base effects will support the decline in inflation. Tight monetary conditions contribute to avoiding second-round inflationary effects and anchoring inflation expectations. Domestic inflation is expected to decrease slowly in the first half of 2023, and then more significantly from the middle of the year. The consumer price index will return to the central bank tolerance band in 2024.

According to the press release by the Ministry of Finance the deficit target of 6.1 percent was achieved in 2022, with the government debt-to-GDP decreasing to 73.5 percent. A trend reversal in the current account balance has started in recent months, as exports expanded significantly, gas prices moderated, and household consumption adjusted. The higher-than-expected trade deficit in November was mainly due to one-off factors. From 2023, the increasing surplus in items of the current account excluding the energy balance, growing adjustment in the energy market and a decline in gas prices may lead to a rapid improvement. With the normalising global economic environment and terms of trade, as well as with the utilisation of new export capacities built recently, the trade balance will improve significantly, and as a result, the current account deficit is expected to be reduced further.

The Monetary Council kept the base rate at 13 percent at its meeting today. The current level of the base rate is adequate to manage fundamental inflation risks. The O/N deposit rate and the O/N collateralised borrowing rate were left unchanged at 12.5 percent and 25 percent, respectively.

Using its instruments introduced in the autumn to absorb interbank liquidity on a long-term basis, i.e. the revised reserve requirement system, the one-week discount bill and the long-term deposit tender, the MNB strongly supported the maintenance of the effectiveness of monetary policy transmission over the year-end period. Based on this positive experience, the MNB will use these instruments regularly in the coming period. Accordingly, the Bank will hold its long-term deposit tender on 25 January, and from 1 February discount bill auctions will be held on a weekly basis. In addition to strengthening monetary policy transmission, the Bank will continue to use one-day deposit quick tenders and FX swap transactions to ensure financial market stability, and it will continue to meet foreign currency liquidity needs in the coming months to reach market balance related to the energy account.

The Monetary Council is constantly assessing incoming data and developments in the outlook for inflation and is ready to take appropriate actions if risks increase. Looking ahead, maintaining market stability and strengthening monetary policy transmission are also key to achieving price stability. The MNB still focuses on sustained shifts in financial market conditions, and it will maintain the current terms of its instruments introduced in mid-October until a trend improvement in risk perceptions occurs. It is necessary to maintain tight monetary conditions over a prolonged period, which will ensure that inflation expectations are anchored and the inflation target is achieved in a sustainable manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 February 2023.

MAGYAR NEMZETI BANK
Monetary Council