Press release on the Monetary Council meeting of 17 December 2024

17 December 2024

At its meeting on 17 December 2024, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 18 December 2024:

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.

Economic performance in the EU improved at a moderate pace in 2024 Q3, while the rate of economic growth remained buoyant in the US and China. The weak outlook for European industrial production and the generally tense geopolitical situation pose risks in terms of external economic activity.

In November, inflation rose above 2 percent in the euro area, and price growth picked up slightly in the US. Looking ahead, moderate inflation rates are expected as global economic demand remains subdued; however, the stronger price dynamics of market services still represent an inflationary effect. Due to ongoing geopolitical tensions, the prices of energy commodities are characterized by increased volatility.

Global investor sentiment has been volatile since the November interest rate decision. This was mainly driven by expectations for the future interest rate paths of the world’s leading central banks, the intensification of global trade disputes, as well as risks linked to geopolitical conflicts and developments in the domestic politics of some countries in Europe. The European Central Bank reduced interest rates again by 25 basis points in December, and interest rate expectations for the Federal Reserve’s policy rate remained broadly unchanged. In the CEE region, the Polish central bank left its policy rate unchanged in December.

Hungary’s GDP fell by 0.8 percent in 2024 Q3 year-on-year. The declining performance of industry, construction and agriculture were the driving forces behind the slowdown in the economy, while services made a positive contribution to economic growth. In October, the volume of retail sales continued to grow rapidly, while industrial production and construction activity declined. Real wage growth remained strong, but consumer confidence fell again in November. The savings rate remained at a high level. Following the decline in September, the number of employees stabilised in October. The unemployment rate remained low at 4.5 percent.

Household consumption, gradually expanding in 2024, is expected to be the driver of growth looking ahead, supported by the launch of the Subsidised Workers’ Credit Programme and an increase in family tax allowances, in addition to a rise in real wages. However, the investments are expected to fall significantly this year, restraining economic growth in 2024. Delayed investments in the corporate sector may start to be partially offset with a sustained improvement in demand from 2025 onwards. Subdued European economic activity will continue to hold back domestic exports in the short term. However, ongoing and newly announced, significant capacity-enhancing foreign direct investment projects will stimulate exports from the middle of 2025 and Hungary’s export market share is likely to increase in parallel. The Hungarian economy is expected to grow by 0.3–0.7 percent in 2024, by 2.6–3.6 percent in 2025, by 3.5–4.5 percent in 2026, and by 2.5–3.5 percent in 2027.

Trends in domestic lending continue to have a dual nature: the household credit market has continued to pick up, while corporate credit demand remained low. After 2024, the annual growth rate of household loans may continue to increase further in 2025 with the launch of the Subsidised Workers’ Credit Programme, while the rate of corporate lending is expected to stabilise at a higher level from 2025 H2, in parallel with a pick-up in economic performance and the easing of uncertainty.

In November 2024, inflation rose to 3.7 percent and core inflation moderated to 4.4 percent. The rise in the consumer price index mainly reflected the accelerating growth rate of fuel prices. The decline in core inflation reflected the continued disinflation of services prices from a high level. The extent of repricings in November was below the historical average in the case of tradables, while in the case of market services and food it was above the historical average. The Council continues to closely monitor pricing decisions in the services sector. Household inflation expectations rose in November.

Inflation is expected to increase further temporarily until January 2025 and may be above the central bank tolerance band. Disinflation will restart thereafter, in 2025 Q1. In 2025, inflation is expected to remain within the tolerance band for most of the year, before returning to the 3 percent central bank target in a sustained manner at the beginning of 2026. The slowdown in price dynamics is driven by more subdued underlying developments compared to the MNB’s earlier expectations, and more moderate backward-looking repricings next year. The exchange rate depreciation seen in past months as well as changes to the system of excise duties are likely to slow disinflation next year. According to the MNB’s projection, annual inflation is expected to be between 3.6–3.7 percent this year on average, between 3.3–4.1 percent in 2025, and between 2.5–3.5 percent in 2026 and 2027. Anchoring inflation expectations, preserving financial market stability and a disciplined monetary policy are crucial for the consumer price index to return to the central bank target in a sustained manner.

In the first ten months of the year, the current account balance showed a surplus of nearly 5.6 billion euros, and the monthly surplus was significant in October as well. The increase in the current account surplus this year will largely reflect a more favourable trade balance. With the more intense use of existing capacities and the ongoing investment projects turning productive, Hungary’s rising export market share is expected to result in a sustained surplus in the country’s external position over the forecast horizon as foreign demand normalises. The current account surplus is expected to be between 1.5–2.7 percent of GDP in 2024, between 1.0–2.4 percent of GDP in 2025, between 1.5–3.1 percent of GDP in 2026, and between 1.8–3.6 percent of GDP in 2027.

The fiscal deficit is expected to fall steadily over the forecast horizon. The improvement in the balance in 2024 has been driven by falling energy expenditures resulting from the stabilisation of energy prices and restrained public investment. The draft budget submitted for 2025 confirmed the 3.7 percent deficit target, the achievement of which will be mainly supported by a significant decline in government interest expenditures and tax measures aimed at increasing revenues. According to the MNB’s projection, the primary balance excluding interest expenditures is likely to reach near-equilibrium levels over the entire forecast horizon. The MNB expects the government debt-to-GDP ratio to fall substantially by the end of the forecast horizon as the deficit declines gradually. For the debt ratio to continue declining and Hungary’s risk perception to improve, it is necessary to achieve the set deficit targets in a disciplined manner.

In the past month, there have been two credit rating agency revisions. Moody’s has changed the current outlook for Hungary's investment grade rating from stable to negative, while Fitch Ratings has upgraded the outlook from negative to stable. In addition to macroeconomic fundamentals, the perception of fiscal and monetary policy outlook had a key role in the credit rating agencies’ assessment.

The Monetary Council underlined three alternative risk scenarios around the baseline projection in the December Inflation Report. The highlighted alternative scenarios presume persistently weak European economic activity, an increase in trade policy tensions, and capital outflows from emerging economies.

The Monetary Council is committed to the achievement of the inflation target in a sustainable manner. In the current macroeconomic environment, the Bank can make the most effective contribution to the easing of economic agents’ increased precaution and to the restart of economic growth by maintaining price stability and financial market stability.

Based on this assessment, the Council left the base rate unchanged at 6.50 percent at today’s meeting. Accordingly, the O/N deposit rate and the O/N collateralised lending rate were also left unchanged, at 5.50 percent and 7.50 percent, respectively. Restrictive monetary policy contributes to the maintenance of financial market stability and the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates.

The Bank considers it crucial that short-term interest rates develop consistently with the level of interest rates determined by the Monetary Council in every sub-market and in every period. In line with its earlier practice, the Bank pays special attention to the expected state of the FX swap market at the end of the year. To ensure the effectiveness of monetary policy transmission, the MNB smooths movements in financial markets by using instruments with longer maturities in December, in addition to one-day FX swap tenders announced on a daily basis and weekly discount bill auctions.

The expected interest rate paths and future fiscal policies of major economies are still surrounded by uncertainty. Ongoing geopolitical tensions are raising upside risks to inflation through risk aversion towards emerging markets. Looking ahead, a careful and patient approach to monetary policy is warranted. In the Council’s assessment, geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant further pause in cutting interest rates.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 15 January 2025.

MAGYAR NEMZETI BANK
Monetary Council