Press release on the Monetary Council meeting of 23 April 2024

23 April 2024

At its meeting on 23 April 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 24 April 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.

The US economy continued to grow steadily. The Chinese economy picked up at a rate above expectations in 2024 Q1, primarily reflecting the effects of economic policy measures aimed at stimulating demand. The performance of the euro area economy continues to be subdued. Confidence indicators improved in 2024 Q1; however, risks to the short-term outlook for economic growth in Europe are skewed mainly to the downside.

Inflation in the euro area has fallen further. In March, inflation in the US was again slightly above the figure seen in the previous month and expectations. Looking ahead, weakening global economic demand and lower commodity prices compared to previous years continue to point to moderate inflation rates. The escalation of the conflict in the Middle East has led to increases in oil and gas prices, and may also cause disruptions in global value chains, leading to a renewed rise in freight costs. Persistently high inflation of services can be observed generally in the global economy, which restrains disinflation.

International risk appetite has decreased since the March policy decision. Sentiment in global financial markets was primarily affected adversely by expectations for the interest rate policies of the world’s leading central banks, incoming macroeconomic data and developments related to the conflicts in the Middle East. In the case of the Federal Reserve, the expected interest rate path, based on market pricings, shifted further upwards relative to March, while market expectations for the path of the ECB’s policy rate remained broadly unchanged. In 2024 Q1, long-term yields in developed markets particularly in the US and in emerging markets continued to rise. In the CEE region, the Polish and the Romanian central banks left monetary conditions unchanged in April.

Following the downturn in 2023, a slow recovery began in the Hungarian economy at the beginning of 2024. Growth may pick up in the second half of the year. In February 2024, industrial production, construction output and the volume of retail sales rose slightly. As regards the main determinants of household consumption, real wages have been rising again since September 2023. The slow improvement in the consumer confidence indicator reflects a gradual easing of the precautionary motive. Labour market tightness has eased over the past months. With a high level of employment, the unemployment rate rose slightly to 4.6 percent in February.

In 2024, with persistently moderating inflation, continuously rising real wages and strengthening confidence, the gradual expansion in Hungary’s GDP will be mainly supported by domestic demand components. Persistently weak European economic activity is holding back, while significant capacity-enhancing foreign direct investment projects are stimulating, export performance. In 2024, GDP may grow by 2.0-3.0 percent based on the MNB’s projection. A balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase.

Disinflation has been strong and general in the Hungarian economy. In March, consumer prices rose by 3.6 percent in annual terms, and as a result, inflation has been within the Bank’s tolerance band since the beginning of the year. The consumer price index fell by 0.1 percentage point compared to the previous month, while core inflation eased by 0.7 percentage points to 4.4 percent on a year earlier. Inflation and core inflation were in line with the projection in the March Inflation Report. Household inflation expectations have fallen in recent months.

The pace of price increases will rise temporarily in the middle of this year due to the backward-looking pricing of market services and base effects. The decline in core inflation, capturing underlying developments, will stop in the second quarter and it is expected to fluctuate between 4.5 and 5.0 percent in the remainder of the year. Anchoring inflation expectations, preserving financial market stability and disciplined monetary policy are crucial for the consumer price index to return into the central bank tolerance band on a sustained manner from next year.

In February, the current account surplus rose to historically high levels. Exports and imports are expected to grow at nearly the same rate this year, and as a result, the improvement in the trade balance will be driven mainly by an improvement in the terms of trade due to lower energy prices. Overall, the current account balance as a share of GDP is expected to improve slightly in 2024 and to a greater extent in the coming years, in parallel with an increase in Hungary’s export market share.

According to the MNB’s projection, the government deficit may decline in 2024, with the primary balance improving to reach near equilibrium levels again after five years. Gross government debt fell to 73.5 percent of GDP by the end of 2023. For the debt ratio to decline continuously in 2024 and Hungary’s risk perception to improve, it is also necessary to achieve the set deficit targets in a credible manner.

Disinflation in the Hungarian economy has continued, while external and domestic demand pressures have remained persistently low. Historically high foreign exchange reserves and the persistent improvement in the current account balance have contributed to the strengthening of the country's risk perception; however, in the deteriorating international sentiment, the risk premium on Hungarian assets has also risen recently. According to the assessment of the Monetary Council, the outlook for inflation warrants further reduction in the base rate at a slower pace than earlier. The volatile risk environment continues to warrant a careful and patient approach to monetary policy. In line with this, at its meeting today, the Monetary Council cut the base rate by 50 basis points to 7.75 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 6.75 percent, while the upper bound, i.e. the O/N lending rate, will be lowered to 8.75 percent. Monetary policy continues to contribute to the maintenance of financial market stability, the continuation of disinflation and the achievement of the inflation target by ensuring positive real interest rates.

Risks surrounding global disinflation, volatility in international investor sentiment and the sustainable continuation of domestic disinflation warrant a careful and patient approach to monetary policy in the coming months. The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment. In the new phase which started in April, the Monetary Council is proceeding at a slower pace than before, and will take decisions on any further reductions in the base rate in a data-driven manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 May 2024.

MAGYAR NEMZETI BANK
Monetary Council