Press release on the Monetary Council meeting of 25 February 2025

25 February 2025

At its meeting on 25 February 2025, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 26 February 2025:

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 EU economy grew slightly in 2024 Q4. By contrast, growth was buoyant in the US and the rate of China’s economic growth picked up. Intensifying trade policy tensions, the weak outlook for EU industrial production and the generally tense geopolitical situation continue to pose risks to external economic activity.

Global disinflation has come to a halt since last September, and consumer price indices have risen in a number of economies. In January, inflation rose to 2.5 percent in the euro area and to 3.0 percent in the US. Looking ahead, increases in trade tariffs and continued high price dynamics in market services continue to pose upside risks to inflation. Crude oil and natural gas prices have remained broadly unchanged over the past month overall, but the latter remain at a higher level than the previous year’s average.

Amid high volatility, global investor sentiment has improved overall since the January interest rate decision. This was mainly driven by developments related to the US tariff hikes and geopolitical conflicts, as well as by expectations for the future interest rate paths of the world’s leading central banks. The Federal Reserve (Fed) left the target range for the federal funds rate unchanged, while the European Central Bank (ECB) reduced interest rates by another 25 basis points in January. Market pricings suggest a continued divergence between the monetary policies of the Fed and the ECB in 2025 H1, which could lead to increased risk aversion towards emerging markets. In the CEE region, the Czech central bank lowered its policy rate by 25 basis points, while the Polish and the Romanian central banks left their policy rates unchanged.

The Hungarian economy grew by 0.4 percent year-on-year in 2024 Q4. Compared to the previous quarter, GDP grew by 0.5 percent, bringing the technical recession to an end. Retail sales stagnated in December, while industrial production and construction activity declined. Real wage growth continues to be strong. The number of employees declined slightly but remains high by historical standards, while the unemployment rate fell to 4.3 percent.

Consumption, gradually expanding with the rise in real wages, is expected to be the driver of growth looking ahead. With a sustained improvement in demand, delayed investments in the corporate sector may start to be offset this year. Subdued European economic activity is holding back Hungarian exports; however, exports are expected to pick up from the middle of 2025, with a parallel rise in the country’s export market share. The Hungarian economy is expected to gradually return to a balanced growth path.

Trends in domestic lending continue to have a dual nature: the household credit market picked up further in December, while corporate credit demand was low. The annual growth rate of household loans may continue to increase in 2025, while the growth rate of corporate lending is expected to stabilise at a higher level from 2025 H2, in parallel with a pick-up in economic performance and the easing of uncertainty.

Consumer prices rose by 5.5 percent year-on-year in January, exceeding expectations. Core inflation stood at 5.8 percent in January. The rise in the CPI was mainly driven by accelerating price dynamics of market services, fuel and processed food. Repricings in market services at the beginning of the year, well exceeding the historical average, largely reflected price hikes in the telecommunications and financial sectors. The Council continues to closely monitor pricing decisions in the services sector. Household inflation expectations remain at a high level.

The disinflationary trend is expected to restart in the first quarter. Disinflation is likely to be supported by more moderate repricings in market services in the spring compared to last year, while being slowed down by changes to the system of excise duties and by the exchange rate depreciation at the end of last year. Incoming data provide evidence that the risk of a higher inflation path this year has increased further. As a result, the consumer price index is expected to return to the tolerance band later than projected in the December Inflation Report. 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 2024, the current account balance showed a surplus of EUR 6.1 billion, with the monthly balance in December rising by more than EUR 1 billion on a year earlier. The increase in the current account surplus in 2024 largely reflects a more favourable trade balance. With a higher utilisation of existing capacities and the ongoing investment projects turning productive, Hungary’s rising export market share is expected to result in a persistently significant surplus in the country’s external position over the forecast horizon as external demand normalises in 2025 H2. The country's favourable external financing position and the previously announced foreign investments, coupled with the expected continued significant FDI inflow point to a reduction in external debt indicators in the coming years.

The fiscal deficit decreased in 2024 as the primary balance was near equilibrium. Based on preliminary financial accounts data, the accrual-based budget deficit amounted to 4.8 percent of GDP in 2024, and the government debt-to-GDP ratio rose from 73.4 in 2023 to 73.6 percent at the end of the year. Achieving the 3.7 percent target adopted by Parliament will be supported by declining interest expenditures and tax measures aimed at increasing revenues. According to the MNB’s projection, the primary balance excluding interest expenditures is likely to reach near-equilibrium levels over the entire forecast horizon. The government debt-to-GDP ratio is also expected to fall substantially by the end of the horizon as the fiscal deficit declines gradually. For the debt ratio to decline and Hungary’s risk perception to improve, it is necessary to achieve the set deficit targets in a disciplined manner.

The Monetary Council is committed to 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 the Council’s assessment, maintaining the effectiveness of monetary policy transmission is warranted in order to reach the inflation target again and to maintain financial market stability.

Based on this assessment, the Council left the base rate unchanged at 6.50 percent at today’s meeting. Accordingly, the O/N deposit rate and the O/N collateralised lending rate were also left unchanged, at 5.50 percent and 7.50 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.

A careful and patient approach to monetary policy remains warranted due to trade policy and geopolitical tensions, upside risks to inflation as well as to uncertainty surrounding the future interest rate paths of the world’s leading central banks. In the Council’s assessment, the uncertain international environment and the outlook for inflation warrant the maintenance of tight monetary conditions.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 12 March 2025.

MAGYAR NEMZETI BANK
Monetary Council