Press release on the Monetary Council meeting of 27 February 2024

27 February 2024

At its meeting on 27 February 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 February 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 and Chinese economies grew strongly, while European economic growth stagnated in 2023 Q4. The short-term economic outlook is still exposed to downside risks, which is further exacerbated by the generally tense geopolitical situation.

Inflation in the euro area fell in January following a temporary increase in December. Underlying developments still point to a decline. In the US, the pace of price increases slowed in January, but both headline inflation and core inflation were higher than expected. Weakening global economic demand and lower commodity prices compared to previous years suggest a continued decline in inflation rates. However, the increase in international freight costs due to the Red Sea conflict may cause disruptions in global value chains, leading to a renewed rise in freight costs. Despite geopolitical tensions, oil prices remained around USD 80 while European gas prices fell.

International risk appetite has remained broadly unchanged since the January interest rate decision. Sentiment in global financial markets was influenced by expectations for the interest rate policies of the world’s leading central banks, incoming macroeconomic data, and particularly the higher-than-expected inflation figure in the US, as well as by developments related to the conflicts in the Middle East. Based on market pricings, the expected date of the first interest rate cuts by the Federal Reserve and the European Central Bank has been pushed back. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points, while the Polish and the Romanian central banks left monetary conditions unchanged in February.

Hungarian economic performance stagnated in 2023 Q4 following the rebound in the previous quarter. Primarily due to high inflation, domestic GDP decreased by 0.8 percent throughout 2023. The performance of agriculture moderated the decline in 2023. In December, industrial and construction output fell sharply, while the volume of retails sales declined slightly relative to a year earlier. As regards the main determinants of household consumption, real wages continued to rise in 2023 Q4, in line with disinflation. At the same time, the development in the consumer confidence index in recent months implies gradual easing of the precautionary motive. Strong tightness of the labour market has eased in the last months. Accompanied by a high level of employment the unemployment rate is low even by EU standards.

As inflation moderates, real wages rise and confidence gradually recovers, leading to a recovery in domestic demand, a balanced economic growth is expected in 2024. Persistently weak European economic activity is holding back domestic exports, but with the pick-up in the production of new export capacities built recently, Hungary’s export market share is expected to increase.

Disinflation has been strong and general in the Hungarian economy. In January, consumer prices rose by 3.8 percent in annual terms, bringing inflation within the Bank’s tolerance band. The consumer price index fell by 1.7 percentage points from the previous month, with market services and non-durable industrial goods making the largest contributions, in addition to fuel. The impact of the increase in excise duties, taking effect from 1 January 2024, was mainly reflected in a compression of retail margins, and therefore had a small impact on fuel prices so far. Core inflation eased by 1.5 percentage points to 6.1 percent relative to a year earlier.  Domestic inflation was one of the lowest in the region in January. The annualised three-month change in core inflation has been below 3 percentage since October, and repricings at the start of the year were subdued. Household inflation expectations have fallen in recent months.

In the coming months, inflation developments will be driven by two opposing factors. The impact of the increase in excise duties on fuel will raise headline inflation, while underlying inflation will continue to moderate. Inflation will remain close to the upper bound of the tolerance band in the coming months, before rising temporarily in the middle of the year, as in other countries, due to base effects. The consumer price index is expected to return to the Bank’s inflation target on a sustained basis in 2025.

The current account improved significantly in 2023, turning into a surplus of 0.2 percent of GDP from a deficit of more than 8 percent of GDP in 2022, according to preliminary monthly data. The current account was in a EUR 1,049 million deficit in December 2023 following a surplus in the previous four months. The improvement in Hungary’s external position over the past several months has slowed down, which was mainly driven by a deterioration in the trade balance, while the services balance remained in surplus. At the same time, the current account balance recovered at an unprecedented rate by historical standards in 2023.

The current account balance is expected to improve further in 2024 and in the coming years. Looking ahead, the utilisation of new export capacities built recently and the recovering global economic environment are expected to give new impetus to exports. The inflow of EU funds will contribute to a strengthening in Hungary’s net lending and a further increase in central bank foreign exchange reserves which are already at historically high levels.

According to preliminary financial accounts data released by the MNB, general government net lending amounted to -6.7 percent of GDP in 2023. The government deficit-to-GDP ratio fell to 73.5 percent in 2023 from 74 percent a year previously.

Over the past few months, disinflation in the Hungarian economy has been stronger than expected, while external and domestic demand pressures remain persistently low. As a result of the improvement in Hungary’s current account balance, the country’s risk perception has improved further despite a volatile global sentiment. According to the Monetary Council, this allows the base rate to be lowered at a temporarily faster pace. In line with this, at its meeting today the Monetary Council cut the base rate by 100 basis points to 9 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 8 percent, while the upper bound, i.e. the O/N lending rate, will be lowered to 10 percent. Positive real interest rates will help to continue disinflation and achieve the inflation target.

Risks surrounding global disinflation and volatility in international investor sentiment warrant a careful approach to monetary policy. The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment. In the coming months, decisions on any further reductions in the base rate and their optimal pace will be made on the basis of this information, in a data-driven manner.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 13 March 2024.

MAGYAR NEMZETI BANK
Monetary Council