Press release on the Monetary Council meeting of 18 June 2024

18 June 2024

At its meeting on 18 June 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 19 June 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.

In Europe, risks to the short-term outlook for economic growth are skewed to the downside; however, confidence indicators improved slightly in May 2024. The US economy continues to grow steadily. The Chinese economy expanded at a rate above expectations in 2024 Q1. The ongoing Russia-Ukraine war, the generally tense geopolitical situation and expected developments in European industrial production pose risks in terms of external economic activity.

In May, the rise in euro-area annual inflation relative to the previous month exceeded expectations, while consumer price increases slowed slightly in the US. Services inflation has been generally higher compared to the levels seen before Covid-19, which restrains disinflation. Geopolitical conflicts have led to increased volatility in the energy market and may still cause disruptions in global value chains. However, looking-ahead, subdued global economic demand points to moderate inflation rates. Oil prices have been unchanged, and gas prices have risen since the latest interest rate decision.

Global risk appetite has fallen since May, in which the interest rate decisions of the world’s leading central banks and the European Parliament elections played an important role. At its rate-setting meeting in June, the European Central Bank reduced its policy rates by 25 basis points, in line with expectations. According to the ECB’s communication, the pace and timing of interest rate cuts will continue to be determined by incoming data. The Fed left interest rates unchanged at its previous policy meeting. The upward shift in interest rate path indicated by market pricing data, and the expected higher level of US interest rates for a prolonged period will influence central banks’ room for monetary policy manoeuvre in emerging economies. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points to 5.25 percent at its latest rate-setting meeting, while the Polish and the Romanian central banks left monetary conditions unchanged.

Hungarian economic growth started in 2024 Q1. The significant increase in real wages, the gradual easing of the precautionary motive, as well as the improvement in consumer confidence were all reflected in growing household consumption in the first quarter. However, the general decline in investment decelerated the pace of economic growth. Net exports made a positive contribution to growth with generally subdued import demand. In April, industrial production rose significantly on a year earlier due to a favourable calendar effect; however, underlying output growth remains subdued. Construction output rose compared to the same period of 2023, and the volume of retail trade continued to grow in annual terms. The unemployment rate remained unchanged from March and stood at 4.4 percent in April. With a high level of employment, labour market tightness has eased over the past quarters.

In 2024, the gradual expansion in Hungary’s GDP will be mainly supported by the strengthening of domestic demand. In addition to the easing of the precautionary motive, the expansionary effect of strong real wage growth on consumption will become increasingly pronounced in the rest of the year. Investment may still slow down economic growth in 2024. Public investment may decrease this year, while residential investment may increase. The corporate sector has taken a wait-and-see approach to investment; however, with the persistent improvement in demand, deferred investment will be gradually brought back on stream in 2025. Exports will be affected by opposing trends. Subdued European economic activity is holding back domestic exports, but ongoing and newly announced, significant capacity-enhancing foreign direct investment projects will continue to stimulate exports in the coming years. With the pick-up in the production of new export capacities built recently, balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase. Hungary’s GDP is expected to grow by 2.0–3.0 percent in 2024, by 3.5–4.5 percent in 2025 and by 3.0–4.0 percent in 2026.

In May, consumer prices rose by 4.0 percent in annual terms. The increase in inflation was caused by rises in fuel prices and base effects. Core inflation and core inflation excluding indirect tax effects continued to decline, both falling to 4.0 percent. The monthly price increase in core inflation was above the historical average, due to the backward-looking repricing of certain market services. Household inflation expectations rose slightly in May relative to April.

The short-term outlook for inflation has improved. More favourable than expected spring data and decreasing world oil prices together will result in a lower inflation path in 2024 compared to the March forecast. The inflation rate is expected to fluctuate within the tolerance band, close to its upper bound in the coming months, too. However, the decline in core inflation capturing underlying developments will stop in the second quarter and core inflation will rise close to 5.0 percent by the end of the year. According to the MNB’s projection, annual inflation is expected to be between 3.0 and 4.5 percent this year on average. Inflation may be between 2.5 and 3.5 percent in 2025 and 2026. Anchoring inflation expectations, preserving financial market stability and disciplined monetary policy are crucial for the consumer price index to return to the central bank target in a sustained manner from next year.

In April, the current account surplus rose to another historically high level. In the coming years, the current account surplus may be even larger than the Bank’s previous expectation. The expected increase in the surplus in 2024 as a whole primarily reflects a further improvement in the terms of trade, declining investment activity characterised by a high import share and inventory accumulation. Over the longer term, with earlier manufacturing investment projects turning productive, the country’s increasing export market share will support the improvement in the external balance. The current account surplus will continue to rise over the forecast horizon, which is expected to reach 1.5–2.7 percent of GDP in 2024, before rising to 3–4 percent in 2025 and 2026.

The government deficit-to-GDP ratio may be between 4.5 and 5.0 percent in 2024, between 3.5 and 4.5 percent in 2025 and between 2.8 and 3.8 percent in 2026, depending on macroeconomic developments and the extent of fiscal control. The primary balance is expected to improve to reach near equilibrium levels this year. The government debt-to-GDP ratio is expected to decline steadily, which will require the set deficit targets to be achieved in a disciplined manner.

The Monetary Council highlighted three alternative risk scenarios around the baseline projection in the June Inflation Report. In the scenario which assumes a deceleration in global economic activity, both economic growth and inflation may be lower compared to the baseline. The alternative scenario presuming a divergence between the Fed’s and the ECB’s monetary policy is consistent with a higher inflation path and lower growth path. The scenario assuming faster wage growth and a quick recovery in consumption is in line with a higher growth path and inflation path compared to the baseline scenario.

From the perspective of monetary transmission, the Bank considers it crucial that short-term interest rates develop consistently with the level of the base rate determined by the Monetary Council in every sub-market and in every period. The Bank pays special attention to developments in the FX swap market at the end of the quarter. The MNB ensures the maintenance of financial market stability using two instruments with maturity extending beyond the end of the quarter: T/N FX swap tender announced on a daily basis, and the weekly discount bill auction.

Based on the Monetary Council’s assessment, the outlook for inflation has improved in the past quarter. In addition, the incipient recovery in Hungarian economic growth, historically high foreign exchange reserves, the persistent improvement in the current account balance and a cautious approach to monetary policy act in the direction of an improvement in the country’s risk perception. However, the volatile financial market environment, significant geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach. In line with this, at its meeting today, the Monetary Council lowered the base rate by 25 basis points to 7.0 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 6.0 percent, while the upper bound, i.e. the O/N lending rate, will be decreased to 8.0 percent. Monetary policy continues to contribute to the maintenance of financial market stability and the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates.

Looking ahead, risks surrounding global and domestic disinflation, volatility in international investor sentiment and expected interest rate policies of the world’s leading central banks warrant a careful and patient approach to monetary policy. The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment, based on which it will take decisions on the level of the base rate in a cautious and data-driven manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 July 2024.

MAGYAR NEMZETI BANK
Monetary Council