Press release on the Monetary Council meeting of 19 November 2024

19 November 2024

At its meeting on 19 November 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 20 November 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 2024 Q3, economic growth continued at a moderate pace in Europe. In the US, the labour market remained strong and the economy grew steadily. Chinese economic growth slowed slightly. European economic activity may be subdued mostly due to the prolonged weak industrial production, while the ongoing Russia-Ukraine war, the intensification of the conflict in the Middle East and the generally tense geopolitical situation remain key risks. The outlook for economic growth next year deteriorated in the euro area, and it improved moderately in the US, while there were no changes in China.

Slightly rising in October, inflation stood at 2 percent in the euro area and price dynamics moderately accelerated 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 represents an inflationary effect. As a result of geopolitical conflicts, the developments in oil and gas prices are surrounded by increased volatility, and looking ahead by uncertainty.

Since the October interest rate decision global investor sentiment has been volatile. This has primarily been driven by geopolitical developments, expectations for the macroeconomic outlook of developed economies and for the future interest rate paths of the world’s leading central banks. Risk aversion towards emerging markets has increased in parallel with strengthening of the US dollar in the period. The Federal Reserve reduced interest rates by 25 basis points in November. Over the past month, medium-term interest rate expectations for the policy rate have shifted upwards in the US, while the expected interest rate path of the European Central Bank has remained broadly unchanged. In the CEE region, the Czech central bank reduced its policy rate by 25 basis points, and the Polish and the Romanian central banks left interest rates unchanged at their latest rate-setting meetings.

Based on preliminary data, Hungary’s GDP declined by 0.8 percent year-on-year in 2024 Q3. The weak performance of industry, construction and agriculture were the driving forces behind the slowdown of the economy, while the decline was held back by an increase in value added in services. Real wage growth has continued to be strong. With gradual improvement in consumer confidence seen this year, savings rate has remained at a high level. The unemployment rate rose to 4.5 percent in September; however, the labour market has remained close to full employment.

Gradually rising household consumption will be the main driver of domestic GDP growth in 2024. By contrast, the volume of investment is expected to fall in 2024. Underinvestment 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 in the coming years after external demand have strengthened; therefore, Hungary’s export market share is likely to increase.

In the first nine months of the year, the household credit market picked up from its end-2023 low and grew at an accelerating pace; however, the corporate sector is still characterised by a wait-and-see approach regarding credit demand. After 2024, the annual growth rate of household loans may continue to increase in 2025, while the rate of corporate lending is expected to stabilise at a higher level from 2025 H2 in parallel with the pick-up in the economic performance and the ease in uncertainty.

In October 2024, inflation rose to 3.2 percent and core inflation was 4.5 percent. The rise in inflation reflected the accelerating dynamics in food and fuel prices, which was partly offset by moderating rises in annual services prices. The extent of repricing in the case of market services and tradables prices in October remained below the historic average and it was above the historic average in the case of food prices. The significant decline in market services prices on a monthly basis was due to a significant fall in mobile phone and internet fees. The Council continues to closely monitor pricing decisions in the services sector. Household inflation expectations have been declining; however, they have remained at a significantly higher level than that of past periods of price stability.

Inflation is expected to rise temporarily in the rest of the year. Lower-than-expected inflation in October indicates lower inflation in the short term; however, exchange rate depreciation seen in past months, as well as changes to the system of excise duties are likely to have inflationary effects in the next year. 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 2025.

The current account registered a surplus of more than EUR 5 billion in the first nine months of the year, with the surplus of monthly balance increasing further in September. The increase in the current account surplus this year will be largely explained by a more favourable goods balance. From 2025 onwards, a rising export market share resulting from the more intense use of existing capacities and new investments is likely to be reflected in a further improvement in the external position. According to the MNB’s forecast, the current account surplus is to reach 2 percent of GDP in 2024, and the balance is likely to continue to improve in the coming years.

The deficit reduction measures of 2024 contribute to the achievement of the 4.5 percent deficit target set for this year. The submitted draft budget for 2025 confirmed the 3.7 percent deficit-to-GDP target, to which deficit reduction measures were also allocated. Achieving the fiscal deficit target requires keeping expenditure under control, similarly to 2024. According to the MNB’s projection, the primary balance excluding interest expenditures is likely to reach near-equilibrium levels over the entire forecast horizon. In parallel with a gradual decline in government interest expenditures, the fiscal balance is expected to improve in the coming years. For the debt ratio to continue declining and Hungary’s risk perception to improve, it is necessary to achieve the set deficit targets.

In the Monetary Council’s assessment, the increase in risk aversion towards emerging markets poses an upside risk to domestic inflation. The expected interest rate paths of the world’s leading central banks are still surrounded by uncertainty, and the external interest rate environment may ease more slowly than previously expected.

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 preserving price stability and maintaining 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 stands ready to smooth 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 increasing risk aversion towards emerging markets. Looking ahead, a careful and patient approach to monetary policy is still warranted. Based on the incoming macroeconomic and financial market data, the Monetary Council will take decisions on the level of the base rate in a cautious and data-driven manner. 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 4 December 2024.

MAGYAR NEMZETI BANK
Monetary Council