Press release on the Monetary Council meeting of 29 August 2023

29 August 2023

At its meeting on 29 August 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 30 August 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.

In line with expectations, economic growth in the European Union was close to stagnant in 2023 Q2. The US economy grew more strongly than expected, while growth in China fell short of expectations. The global economic outlook continues to be characterised by duality. In the year as a whole, output growth is expected to slow in developed countries. Meanwhile, growth in emerging countries is likely to be similar to last year. In most countries, labour markets are tight. The easing of the energy crisis in Europe points to an improvement in the outlook for economic activity on the Continent. However, the ongoing Russia-Ukraine war and the persistently high inflationary environment are posing downside risks to growth.

Global inflation rates have continued to fall. The slowdown in global economic activity, the correction in energy and commodity prices and the fall in international freight costs point to a further decline in inflation rates. However, core inflation indicators, generally falling at a slow pace, suggest that achieving price stability again is expected to be a protracted process.

Global risk appetite has fallen since the July policy decision. Investor sentiment was driven by US macroeconomic data releases and developments related to the slowdown in Chinese economic growth. Domestic financial markets showed a stronger reaction than regional ones to changes in international sentiment and movements in the dollar exchange rate. Oil and European gas prices have risen amidst high volatility over the past month. The uncertainty due to the Russia–Ukraine war continues to have a negative impact on investor sentiment.

In line with analysts’ expectations, the Federal Reserve (Fed) and the European Central Bank (ECB) tightened monetary conditions by 25 pasis points at their July policy meetings. Based on market expectations, both central banks are nearing the end of their tightening cycle; however, market pricing indicates that the expected path of interest rates has shifted slightly upwards. The central banks in the CEE region have not changed their policy rates. Based on decision makers’ statements, the Polish central bank may lower its policy rate as early as this autumn, while the possibility of a first rate cut by the Czech and Romanian central banks has been postponed to a later date.

Hungary’s GDP declined by 2.4 percent year-on-year in 2023 Q2. Based on preliminary data, the main contributor to the downturn in domestic economic performance was the decline in industrial output and market services, while agricultural performance and that of the health and social care sectors moderated the decline. In June, industrial and construction output as well as the volume of retail sales continued to fall. Of the manufacturing sub-sectors, production volumes increased in vehicle production and in the manufacture of electrical equipment. The household confidence indicator remains at a low level. The labour market remains tight, the unemployment rate is low.

In the first half of 2023, declining real wages, rising corporate costs and cautious consumer and investment decisions all contributed to a contraction in domestic demand, while net exports supported output growth. From the second half of the year, real wages, rising again in line with falling inflation, are expected to support a pick-up in GDP growth. This year’s economic performance is expected to be improved by the correction in agricultural growth.

The decline in domestic inflation accelerated in July. Consumer prices rose by 17.6 percent in annual terms and core inflation stood at 17.5 percent. The consumer price index fell by 2.5 percentage points compared to June, primarily reflecting a slowdown in the price dynamics of processed food and manufactured goods. Core inflation slowed across a wide range of products and services, so the indicator declined by 3.3 percentage points from the previous month. In July, the annual price index of market services decreased again. Inflation expectations of both households and companies continued to fall.

In the coming months, domestic CPI inflation and core inflation will continue to decrease at a rapid pace. During 2023, the disinflationary effect of tight monetary policy, falling global commodity prices, declining domestic consumption and the Government’s measures to strengthen market competition will become increasingly apparent. The pace of disinflation continues to accelerate. As a result, inflation is expected to decline to the single digit range during the autumn. The consumer price index is expected to return to the central bank tolerance band in early 2025.

The fiscal deficit will continue to decline this year. The budget appropriation for the 2023 deficit is 3.9 percent. The government debt ratio is expected to fall from 73.3 percent at the end of 2022 below 70 percent by the end of 2023, driven by nominal GDP growth and a declining deficit.

The rapid improvement in the external balance has continued. At nearly EUR 550 million, the current account registered a significant surplus in June 2023, primarily due to a trade surplus of EUR 1.7 billion, a record level. The trend-like improvement in the external balance has been driven by the more favourable energy balance and terms of trade, the adjustment of domestic demand and stable export growth. This year, the current account deficit is expected to be more favourable than projected in June, being below 2 percent of GDP as the trade balance improves. In parallel with the utilisation of new export capacities built recently and a normalising global economic environment, 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. With the acceleration of disinflation, the domestic real interest rate will soon move to positive territory, which will help to achieve the inflation target.

The Monetary Council continued to normalise the interest rate environment at the previous pace in August. In accordance, the Council decided to reduce the interest paid on optional reserves by 100 basis points, from 15 to 14 percent at today’s meeting, with effect from 30 August. In addition, the O/N collateralised lending rate serving as the top of the interest rate corridor was lowered by 100 basis points to 16.5 percent. According to the Council’s assessment, it is also 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, maintaining the current level of the base rate 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 the effects of international financial market developments on the domestic risk environment, incoming macroeconomic data and developments in the outlook for inflation. If the improvement in risk perceptions persists, the Bank will continue to close the gap between the interest rate conditions of one-day tenders and the base rate.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 September 2023.

MAGYAR NEMZETI BANK
Monetary Council