Press release on the Monetary Council meeting of 22 October 2024

22 October 2024

At its meeting on 22 October 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 23 October 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 is likely to have continued at a moderate pace in Europe. In the US, the labour market remained strong and the economy grew steadily. GDP growth slowed in China in the third quarter on an annual basis. There is uncertainty around future developments in European economic activity due to the prolonged weak outlook for 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.

Inflation declined both in the euro area and in the US in September. Looking ahead, moderate inflation rates are expected as global economic demand remains subdued; however, the stronger price dynamics of market services is still restraining disinflation. Oil and gas prices increased sharply following the intensification of geopolitical conflicts, with a correction in global oil prices at the end of the period.

Risk aversion towards emerging markets has increased since the September interest rate decision as global investor sentiment deteriorated. This was mainly driven by the escalation of the conflict in the Middle East and the upward shift in expectations regarding the Federal Reserve’s interest rate path. The European Central Bank (ECB) lowered its policy rates by 25 basis points in October, and based on market pricing, expectations for the year-end level of the ECB’s interest rates 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.

In 2024 Q2, the economic recovery stalled in Hungary. Household consumption picked up relative to a year earlier, and net exports also made a positive contribution to economic growth while investment declined significantly in the second quarter. In August, both industrial production and construction output fell compared to the same period last year, while the annual increase in the volume of retail sales continued. Real wage growth continues to be strong, but consumer confidence is rising slowly from a low level. Despite the increase in household consumption, weak external demand as well as the subdued performance of agriculture and investment are likely to have restrained economic growth in 2024 Q3. The unemployment rate stood at 4.2 percent in August; however, labour market tightness has eased over the past quarters.

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 will start to be partially offset with a permanent 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 continue to stimulate exports in the coming years as demand returns; therefore, Hungary’s export market share is likely to increase. Hungary’s GDP is expected to grow by 1.0–1.8 percent in 2024, by 2.7–3.7 percent in 2025 and by 3.5–4.5 percent in 2026.

In the first eight 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. The annual growth rate of household loans is expected to reach 9 percent in 2024 and to fluctuate around 10 percent from 2025. At the same time, due to the high stock of liquid assets of domestic companies in a regional comparison, the narrower supply of subsidised programmes, and the continued uncertain outlook for economic growth, the annual growth rate of corporate credit is expected to be 3 percent at the end of 2024 before stabilising at around 8–9 percent from 2025 H2.

Declining to 3.0 percent in September, inflation stood at a level consistent with the central bank target and the forecast of the September Inflation Report. Core inflation rose to 4.8 percent. The fall in inflation was driven by slowing fuel price dynamics, which partly resulted from base effects and partly from a decline in fuel prices. The increase in core inflation reflected the stronger price dynamics of processed food. Disinflation of market services continues to be slow; therefore, the Council pays special attention to pricing decisions in the sector. Household inflation expectations have risen slightly in recent months.

The volatility of inflation seen in recent months will persist until the end of the year. The consumer price index is expected to rise slightly above 4 percent by the end of 2024, and core inflation is likely to be around 5 percent in the rest of the year. The disinflationary trend is expected to continue from 2025 Q1. According to the MNB’s projection, annual inflation is expected to be between 3.5 and 3.9 percent this year on average. Average inflation is expected to be between 2.7 and 3.6 percent in 2025 and between 2.5 and 3.5 percent in 2026. 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 improvement in the external position is likely to continue further in 2024. The current account registered a surplus of nearly EUR 4.4 billion in the first eight months of the year, with the monthly balance turning positive again in August. 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 investment 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 announced in the summer will support the attainability of fiscal deficit targets for 2024 and 2025, which also requires keeping fiscal expenditure under control. 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.

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.

In the Monetary Council’s assessment, the domestic inflation outlook is consistent with the projection in the September Inflation Report. However, deteriorating international investor sentiment and volatile commodity prices pose upside risks to domestic inflation. The external interest rate environment may ease more slowly than previously expected, while the expected interest rate paths of the world’s leading central banks are still surrounded by uncertainty.

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 borrowing 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 intensification of geopolitical conflicts has led to rises in energy prices and emerging market risk premia. As a result of these two effects, upside risks to inflation have increased. 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, re-intensifying geopolitical tensions, volatile financial market developments and the risks to the outlook for inflation warrant a pause in cutting interest rates.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 6 November 2024.

MAGYAR NEMZETI BANK
Monetary Council