Press release on the Monetary Council meeting of 24 September 2024

24 September 2024

At its meeting on 24 September 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 25 September 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 continued to be subdued in 2024 Q2. The economy of Germany, Hungary’s most important trading partner, was stagnant. In the US, economic growth picked up in the second quarter as growth declined in China. There is uncertainty around future developments in external economic activity due to the weak outlook for European industrial production, while the ongoing Russia-Ukraine war and the generally tense geopolitical situation remain key risks.

Annual inflation fell both in the euro area and the US in August. Looking ahead, with slowing global economic demand, consumer price indices may continue to decline moderately around the world. The stronger price dynamics of market services is still restraining disinflation. Global oil and gas prices have fallen since the latest interest rate decision.

Investor sentiment has first deteriorated and then improved since the August interest rate decision. The global risk environment was primarily shaped by information on the US economy and the Federal Reserve’s (Fed) policy meeting. In September, the Fed and the European Central Bank (ECB) lowered their policy rates by 50 basis points and 25 basis points, respectively. Based on market pricing, expectations for the year-end level of the Fed’s interest rates shifted down again and expectations for the ECB remained broadly unchanged. In the CEE region, the Polish central bank left its policy rate unchanged in September.

In 2024 Q2, the economic recovery stalled in Hungary. Compared to 2024 Q1, domestic economic performance fell by 0.2 percent, while GDP rose by 1.5 percent in annual terms. Household consumption picked up by 4.2 percent in the second quarter on a yearly basis, and net exports also made a positive contribution to economic growth. By contrast, investment declined significantly. Investment fell in the sectors producing for the domestic and export markets and in others indirectly linked to the state, which was only partly offset by the increase seen in the sectors directly linked to the government and household sectors. Real wage growth continues to be strong, but consumer confidence is rising slowly from a low level. The unemployment rate stood at 4.2 percent in July; 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. The consumption-boosting impact of strong real wage growth and stable employment will become more pronounced over the rest of the year. By contrast, the volume of investment is expected to fall in 2024, causing a significant slowdown in economic growth. 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.

The household credit market picked up in 2024 H1; however, the corporate sector is still characterised by a wait-and-see approach regarding credit demand. Looking ahead, banks expect demand to grow further in the consumer credit market, based on the responses to the Lending Survey. The annual growth rate of household loans is expected to reach nearly 9 percent at the end of 2024 and to fluctuate around 10 percent from the beginning of 2025. However, due to the continued uncertain outlook for economic growth, the annual growth rate of corporate credit is expected to be 4 percent at the end of 2024 before stabilising at around 8–9 percent from 2025 H2.

In August 2024, inflation eased back to the tolerance band again, with consumer prices rising by 3.4 percent in annual terms. Core inflation declined slightly relative to the previous month to stand at 4.6 percent. The fall in inflation in August was primarily due to a decline in fuel price inflation which was largely driven by base effects. Higher food repricing in July was followed by a correction in prices in August. Disinflation of market services continues to be slow; therefore, the Council pays special attention to pricing decisions in the sector. Household inflation expectations are on a downward trend, but display more volatility than usual.

Although the volatility of inflation will persist until the end of the year, the disinflationary trend is expected to continue from 2025 Q1. The consumer price index is expected to fall further in September and to rise slightly above 4 percent by the end of 2024. Continued disinflation in 2025 Q1 will be underpinned by a lower external cost environment and more moderate retrospective repricing next year. Core inflation capturing underlying developments is likely to rise in the coming months, fluctuating around 5 percent during the rest of the year. According to the MNB’s projection, annual inflation is expected to be between 3.5 and 3.9 percent this year on 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. The MNB’s projection for 2025 has been revised upward compared to the June inflation projection, primarily reflecting the pass-through of a rise in financial transaction fees into consumer prices. 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 in 2024. The increase in the current account surplus this year will be largely due to a more favourable goods balance, driven by a further rise in the terms of trade and falling imports, coupled with a decline in investment. From 2025 onwards, a rising export market share resulting from the more intense use of existing capacities and new investments will be reflected in a further improvement in the external position. The surplus on services will stabilise above 5 percent of GDP in the coming years. As a result, the current account surplus is expected to reach 2 percent of GDP in 2024 and is likely to be around 2.0–3.4 percent of GDP in 2025 and around 2.3–3.9 percent of GDP in 2026.

The announced deficit reduction measures will support the attainability of fiscal deficit targets for 2024 and 2025, which also requires keeping fiscal expenditure under control. The budget deficit-to-GDP ratio is likely to be between 4.3 and 4.7 percent in 2024, 3.2 and 4.2 percent in 2025 and between 2.8 and 3.8 percent in 2026. 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 in 2024 and Hungary’s risk perception to improve, it is necessary to achieve the set deficit targets in a credible manner. With the improvement in economic activity over the forecast horizon and the decline in government deficit, the government debt-to-GDP ratio is expected to decrease from the projected level of 73.2 percent in 2024 to 72.3 percent in 2025 and to 70.8 percent in 2026.

The Monetary Council highlighted four alternative risk scenarios around the baseline projection in the September Inflation Report. These scenarios assume faster-than-expected interest rate cuts by major central banks, a prolonged weakness in European economic activity, a faster recovery in consumption driven by a more rapid unwinding of precautionary motives and slower growth in investment, respectively.

The Monetary Council is committed to continuing disinflation and 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 achieving price stability and maintaining financial market stability. Volatile financial market developments, the renewed increase in geopolitical tensions and the risks to the outlook for inflation continue to warrant a careful and patient approach.

The external monetary policy environment has become looser recently and the outlook for external economic activity remains subdued. Disinflation is expected to continue over the monetary policy horizon. Household consumption is expected to pick up gradually as confidence recovers slowly. Financial market developments are stable, and the country’s risk perception has improved slightly overall. In the Monetary Council’s assessment, all these factors allowed a careful reduction in interest rates.

At its meeting today, the Monetary Council lowered the base rate by 25 basis points to 6.50 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 5.50 percent, while the upper bound, i.e. the O/N lending rate, will be decreased to 7.50 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 international and domestic disinflation, as well as the volatility in investor sentiment 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 9 October 2024.

MAGYAR NEMZETI BANK
Monetary Council