Press release on the Monetary Council meeting of 24 October 2023

24 October 2023

At its meeting on 24 October 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 October 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.

Geopolitical tensions have intensified recently, which has led to a general increase in risks surrounding the outlook for economic growth and investor sentiment. In 2023 Q2, economic growth in the European Union slowed while growth accelerated in the US. Economic growth in China slowed in the third quarter, but it exceeded expectations. However, the short-term economic outlook is exposed to downside risks. The persistently high inflationary environment and the ongoing Russia-Ukraine war continue to be a source of significant uncertainty to the outlook for economic activity globally, and particularly in Europe. The escalation of the Gaza-Israel conflict in early October has added to uncertainty, contributing to the general 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, renewed and significant rises in oil and gas prices may stall disinflation. This, combined with core inflation indicators decreasing more slowly, suggests that achieving price stability again is expected to be a protracted process in general.

Global risk appetite has deteriorated since the September policy decision in response to elevated geopolitical risks and rises in developed market yields. Based on market expectations, the Fed is nearing the end of its tightening cycle and the ECB’s interest rates may have peaked; however, monetary conditions will remain tight for a prolonged period, according to communication from both central banks. In the CEE region, the Polish central bank lowered its policy rate by 25 basis points to 5.75 percent in October, and the Czech and Romanian central banks left their interest rates unchanged.

Based on high-frequency data, the gradual increase in domestic economic activity has begun in the third quarter. The household confidence indicator improved slightly in August, but remained at a low level. In August, 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. Falling real wages in the first eight months of the year due to price rises, coupled with consumer and investment decisions becoming cautious, 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 growth 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. Hungarian exports may also rise in 2023, and imports are expected to fall due to the decline in domestic demand items and lower energy prices. 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, Hungary’s economic performance is expected to be in the range of (-0.5)–0.5 percent in 2023. 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 September. Consumer prices rose by 12.2 percent in annual terms and core inflation stood at 13.1 percent. The consumer price index was significantly, 4.2 percentage points lower than the August value, primarily reflecting the slowdown in the price dynamics of regulated products and services as well as processed food, although fuel price inflation rose. Core inflation slowed across a wide range of products and services, so the indicator declined by 2.1 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 4 percent, a level last seen before Covid-19. Recent monthly repricings reflected in inflation and core inflation corresponded to the historical average for September.

In the coming months, domestic CPI inflation and core inflation will continue to decrease. Tight monetary policy, lower commodity prices compared to last year, subdued domestic consumption and the Government’s measures to strengthen market competition are expected to have an increasingly broad-based strong disinflationary effect. Annual inflation is expected to reach the 7–8 percent territory towards 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, 4.0–6.0 percent in 2024 and 2.5–3.5 percent in 2025.

Due to the high fiscal deficit in the first half of the year, less favourable macroeconomic developments than expected and the increase in expenditures, the Government raised the ESA deficit target for 2023 from 3.9 percent to 5.2 percent in early 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, to be followed by annual declines of around 2.5 percentage points.

There has been a rapid and substantial improvement in the external balance. The current account was in surplus again in August 2023. The significant improvement in the external balance position has been driven mainly by 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 a reduction in the country’s vulnerability allow the MNB to continue shaping monetary conditions by lowering the base rate. At the same time, a cautious approach and a slower pace of interest rate cuts are warranted in view of the increasing external risks. In line with this, at its meeting today the Monetary Council cut the base rate by 75 basis points to 12.25 percent. Accordingly, the lower bound of the interest rate corridor, the O/N deposit rate, will be reduced to 11.25 percent, while the upper bound, the O/N loan rate, will be reduced to 13.25 percent. With disinflation accelerating, the domestic real interest rate moved into positive territory in September and, with inflation falling dynamically, it is expected to rise gradually until the end of the year.

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 8 November 2023.

MAGYAR NEMZETI BANK
Monetary Council