Press release on the Monetary Council meeting of 25 April 2023

25 April 2023

At its meeting on 25 April 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 26 April 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 risk to growth. The reversal of energy prices and the favourable 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. However, changes in core inflation indicators suggest that the fall in price indices in most countries might take longer than previously expected. The slowdown in global economic activity, the correction in global energy and commodity prices and the fall in international freight costs point to continued global disinflation.

Investor sentiment has improved since the Monetary Council’s last policy decision. Concerns about the US and European banking sectors have eased, and expectations for interest rate policies of the world’s leading central banks have shifted back into focus.

Communications from the Federal Reserve’s (Fed) and the European Central Bank’s (ECB) decision makers indicate that interest rate hikes are likely to be continued. Based on market expectations, interest rate increases by the Fed and the ECB might soon come to an end. In line with expectations, central banks in the CEE region have not changed monetary conditions.

The Hungarian economy grew by 4.6 percent in 2022. High-frequency data suggest that the pace of economic growth generally slowed in the first months of the year. In February, the volume of retail sales and construction output fell significantly, while industrial production decreased to a smaller extent relative to a year earlier. The household confidence indicator has risen significantly in the past month but 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 a duality this year. Output growth will be weighed down mainly by domestic demand factors. 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.

Domestic inflation peaked in January 2023. In March, annual inflation was 25.2 percent and core inflation stood at 25.7 percent. Inflation declined by 0.2 percentage point compared to the previous month. The slowdown in food and fuel price inflation continued. Compared to February, core inflation rose slightly, which was driven by one-off price increases linked to market services, particularly in the telecommunications sector. By contrast, within core inflation items the prices of durables decreased on a monthly basis. Inflation expectations continue to be elevated; however, corporate price expectations for retail sales and services have been slowing for months.

The consumer price index is expected to decrease at an accelerating pace in the next months, which will also be supported by the growing impact of base effects from the middle of the year. Tight monetary conditions are expected to have broader disinflationary effects. 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 2014 and 2.5–3.5 percent in 2025.

The fiscal deficit will continue to decline in this year. The deficit is projected to be 3.9 percent in 2023. Based on detailed data, the government debt ratio had decreased to 73.3 percent of GDP by the end of 2022, and it is expected to decline to 69 percent this year and close to 65 percent by the end of 2025.

The external balance continued to improve. The current account deficit fell significantly in February 2023, bringing Hungary’s financing balance back into surplus after more than a year. 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 be halved this year. In parallel with a normalising global economic environment and the utilisation of new export capacities built recently, the trade balance and the 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, and therefore the base rate was left unchanged at 13 percent at today’s meeting. In the Council’s evaluation, it is warranted to announce one-day deposit quick tenders and FX swap transactions at unchanged interest rate levels. The current level of the base rate is adequate to manage fundamental inflation risks.

On 14 October 2022, the Monetary Council widened the interest rate corridor substantially in a turbulent financial market environment. In recent times, the risk environment, including Hungary’s risk perception, has improved significantly, driven by external and internal factors. In response to the reduction in the risks of extreme scenarios, the Council has decided to narrow the interest rate corridor. Accordingly, the O/N deposit rate was left unchanged at 12.5 percent and the O/N collateralised borrowing rate was reduced to 20.5 percent.

The transition to the revised reserve requirement system, which took effect from 1 April 2023, was smooth. The Bank will use the instruments to absorb interbank forint liquidity on a long-term basis in the coming period in order to strengthen monetary policy transmission.

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, maintaining market stability and strengthening monetary policy transmission are also key to achieving price stability. 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. The central bank will take into account the persistence of improvements in risk perceptions at the following policy meetings before making a decision to setting the interest rate conditions of overnight instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 May 2023.

MAGYAR NEMZETI BANK
Monetary Council