Press release on the Monetary Council meeting of 23 July 2024

23 July 2024

At its meeting on 23 July 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 July 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.

European economic activity was subdued in 2024 Q2. Confidence indicators remained below long-term averages. In the US, growth may have continued at a moderate pace, while growth in China was slower than expected in the second quarter. The ongoing Russia-Ukraine war, the generally tense geopolitical situation and the weak outlook for European industrial production pose risks in terms of external economic activity.

Annual inflation fell slightly in the euro area and declined markedly in the US relative to the previous month. Services inflation has been generally higher compared to the levels seen before Covid-19, which continues to restrain disinflation. Geopolitical conflicts have led to increased volatility in the energy market and may cause disruptions in global value chains. However, looking ahead, subdued global economic demand points to moderate inflation rates. Oil and gas prices have fallen slightly since the latest interest rate decision.

Indicators of risk have continued to be volatile; however, spreads on European financial assets fell in the wake of election results in France and the UK. At its policy meeting in July, the European Central Bank left interest rates unchanged. According to the ECB’s communication, the pace and timing of interest rate cuts will continue to be determined by incoming data. Economic data released in the US in recent weeks have increased the probability of an interest rate reduction by the Fed at its September meeting and the degree of policy easing expected by the end of the year. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points to 4.75 percent at its rate-setting meeting in June. The Polish central bank left monetary conditions unchanged in July, and the Romanian central reduced interest rates by 25 basis points.

Hungarian economic growth started in 2024 Q1; however, weak economic activity in Europe is having an increasingly lasting impact. 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. The general decline in investments curbed the pace of economic growth. Net exports made a positive contribution to growth with a generally subdued import demand. In May, industrial production fell year-on-year, continuing the weak performance of the sector since the beginning of 2023. Construction output rose compared to the same period of 2023, while the volume of retail trade continued to grow in annual terms. The unemployment rate fell slightly, standing at 4.3 percent in May.

In the remainder of 2024, the revival of household consumption will increasingly support the gradual expansion in Hungary’s GDP. Investments may still slow down economic growth in 2024. 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. Hungary’s GDP is expected to grow by 2.0–3.0 percent this year. With the pick-up in the production of new industrial capacities built recently, balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase.

In June, consumer prices rose by 3.7 percent in annual terms, and as a result the inflation rate remained within the central bank tolerance band. The inflation data was consistent with the projection in the June Inflation Report, while it was lower than market expectations. The decline in inflation was mainly caused by falling fuel prices. Core inflation and core inflation excluding indirect tax effects rose slightly to 4.1 percent. Disinflation of market services continues to be slow, and therefore the Council pays special attention to pricing decisions in the sector. Household inflation expectations fell in June relative to the previous month but remained at high levels.

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 stopped in the second quarter and the indicator will rise close to 5.0 percent temporarily 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. Anchoring inflation expectations, preserving financial market stability and disciplined monetary policy are crucial for the consumer price index to permanently return to the central bank target from next year.

In May, the current account registered another substantial surplus. The expected increase in the balance 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 deficit reduction measures, announced in July, will support the achievement of the fiscal deficit targets of 4.5 percent and 3.7 percent in 2024 and 2025, respectively. The primary government balance is expected to reach near equilibrium levels this year. In 2025, the significant decrease in interest expenses will also contribute to the narrowing of the deficit. In order to further reduce the government debt-to-GDP ratio, it is necessary to achieve the set deficit targets in a disciplined manner.

In the Monetary Council’s assessment, the inflation outlook continues to be consistent with the projection in the June Inflation Report. FX swap market processes at the end of the quarter were stable, which was also supported by the use of central bank instruments. In addition, the incipient recovery in Hungarian economic growth, historically high foreign exchange reserves, the persistent current account surplus, the Government’s deficit reduction measures 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.

At its meeting today, the Monetary Council lowered the base rate by 25 basis points to 6.75 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 5.75 percent, while the upper bound, i.e. the O/N lending rate, will be decreased to 7.75 percent. 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.

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 7 August 2024.

MAGYAR NEMZETI BANK
Monetary Council