Press release on the Monetary Council meeting of 27 August 2024

27 August 2024

At its meeting on 27 August 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 28 August 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 as well. Confidence indicators remained below long-term averages. In the US, economic growth picked up in the second quarter; however, labour market data for the last month were below expectations, indicating a slowdown in economic activity. The ongoing Russia-Ukraine war, the generally tense geopolitical situation and the weak outlook for European industrial production pose significant risks in terms of global economic growth.

Annual inflation increased slightly in the euro area and fell moderately in the US in July. Market services inflation has been generally higher, which continues to restrain disinflation. Geopolitical conflicts have led to increased volatility in the energy market. However, looking ahead, slowing global economic demand points to moderate inflation rates. Since the latest interest rate decision, oil prices have fallen slightly, while gas prices have risen.

At the beginning of August, risk indicators suggested a strong deterioration in global investor sentiment, followed by a reversal from the middle of the month. The global risk environment was primarily shaped by fears of recession in the US economy, financial market developments in Japan and geopolitical tensions in the Middle East. At its July policy meeting, the Federal Reserve left interest rates unchanged, but market expectations for starting interest rate cuts in September have strengthened in response to incoming macroeconomic data. The European Central Bank has continued to highlight the importance of incoming data in its decisions. Based on market pricing, the ECB’s interest rate path has also shifted downwards. In the CEE region, the Czech and the Romanian central banks lowered their policy rates by 25 basis points in August.

In 2024 Q2, 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. The performances of construction and real estate transactions were the most significant contributing factors to annual growth, while economic expansion was restrained by a decline in value added by industry, which constitutes a large share in the national economy. The volume of retail trade continued to grow in annual terms. Strong real wage growth has persisted in recent months; however, the consumer confidence index remained stagnant, overall, in the first half of 2024. The unemployment rate stood at 4.2 percent in July.

With the gradual easing of the precautionary motive, household consumption will support the expansion in Hungary’s GDP in the remainder of 2024. As a result of stalling government investment and the wait-and-see approach to investment by the corporate sector, investment may still slow 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. 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 July, consumer prices rose at a faster pace than in June, by 4.1 percent in annual terms. Core inflation and core inflation excluding indirect tax effects also rose on the previous month, with both measures standing at 4.7 percent. Price increases relative to the previous month were above historical averages in both inflation and core inflation. The rise in inflation primarily reflected an increase in food and fuel prices. The increase in core inflation was mainly driven by the higher 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 fell moderately relative to the previous month but remained at high levels.

The inflation rate is expected to fluctuate close to the upper bound of the tolerance band in the coming months. Core inflation capturing underlying developments will rise close to 5.0 percent temporarily by the end of the 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 from next year onwards.

The balance of payments position improved significantly in the first half of 2024: the current account registered a surplus of nearly EUR 3.7 billion in the first six months of the year. The current account balance fell temporarily in June; however, looking ahead, it is expected to increase throughout 2024 as a whole. This primarily reflects a further improvement in the terms of trade and a sharp decline in 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.

Deficit reduction measures announced at the beginning of July, will support the attainability of fiscal deficit targets for 2024 and 2025, which also requires keeping fiscal expenditure under control. 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, reducing inflation expectations further and preserving financial market stability remain key to achieving price stability again and restoring the sustainable growth path of the domestic economy. 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 temporary sharp rise in the volatility in the financial market environment also affected domestic financial markets over the past month. The 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 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. In line with its stability-oriented approach to monetary policy, the Council left the base rate unchanged at 6.75 percent at today’s meeting. Accordingly, the O/N deposit rate and the O/N collateralised borrowing rate were also left unchanged, at 5.75 percent and 7.75 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.

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. In the Monetary Council’s assessment, there may be scope for cautiously lowering interest rates further in the coming period, depending on the expected interest rate policies of the world’s leading central banks, as well as developments in the domestic inflation outlook and changes in Hungary’s risk perception. 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 11 September 2024.

MAGYAR NEMZETI BANK
Monetary Council