Press release on the Monetary Council meeting of 28 January 2025

28 January 2025

At its meeting on 28 January 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 29 January 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.

EU industrial and retail sales indicators point to subdued economic growth in 2024 Q4. By contrast, US growth was strong based on incoming data and the rate of economic growth picked up in China as well in the fourth quarter. The weak outlook for European industrial production and the generally tense geopolitical situation continue to pose risks in terms of external economic activity.

In December, inflation picked up to 2.4 percent in the euro area and to 2.9 percent in the US. Looking ahead, with a subdued outlook for global economic growth, inflation rates are expected to remain moderate. However, higher price dynamics in market services continue to pose upside risks to inflation. The prices of crude oil and natural gas have risen over the past month in response to geopolitical tensions.

Global investor sentiment has been characterised by a high degree of uncertainty since the December interest rate decision. This was mainly driven by geopolitical developments, news on US tariff hikes and expectations for the future interest rate paths of the world’s leading central banks. The Federal Reserve and the European Central Bank reduced interest rates again by 25 basis points in December. Market pricings suggest a divergence between the monetary policies of the two major central banks in 2025, which could lead to increased risk aversion in emerging markets. In the CEE region, the Czech, Polish and Romanian central banks left their policy rates unchanged.

Based on indicators of economic activity, the performance of the Hungarian economy was subdued and had a strongly dual nature in 2024 Q4. In November, the volume of retail sales continued to grow, while industrial production and construction activity declined. With real wage growth remaining strong, consumer confidence improved somewhat after November. The number of employees declined slightly but remains high by historical standards, while the unemployment rate is low.

Consumption, gradually expanding with the rise in real wages, is expected to be the driver of growth looking ahead. Following the sharp decline in the volume of investment in 2024, delayed investments in the corporate sector may start to be partially offset this year with a sustained improvement in demand. Subdued European economic activity is holding back Hungarian exports in the short term. However, ongoing and newly announced, significant capacity-enhancing foreign direct investment projects will stimulate exports from the middle of 2025 and Hungary’s export market share is likely to increase in parallel. 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 remained low. The annual growth rate of household loans may continue to increase in 2025, while 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 4.6 percent year on year in December, exceeding analysts’ expectations. Average annual inflation stood at 3.7 percent in 2024. Core inflation rose to 4.7 percent in December. The rise in the CPI was mainly driven by increases in processed food and fuel prices, while the rise in core inflation reflected increases in the prices of durables, in addition to processed food. The combined effect of the rise in global commodity prices and movements in the forint market was reflected in the prices of imported goods. The Council continues to closely monitor pricing decisions in the services sector. Household inflation expectations have been on an upward trend since July.

The temporary rise in inflation is expected to continue in January 2025, but the disinflationary trend will restart thereafter. Disinflation is supported by more moderate repricing in market services, while being slowed down by changes to the system of excise duties and the exchange rate depreciation of recent months. Incoming data suggest an increased risk of a higher inflation path this year, with the rate of consumer price increases returning 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 the first eleven months of 2024, the current account balance showed a surplus of nearly EUR 6.1 billion, with a significant monthly surplus in November. 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 sustained surplus in the country’s external position over the forecast horizon as external demand normalises in 2025 H2.

The fiscal deficit decreased in 2024 as the primary balance was near equilibrium. The accrual-based budget deficit and the government debt-to-GDP ratio at the end of the year may have exceeded the planned values. Achieving the 3.7 percent target adopted by Parliament will be supported mainly 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, further strengthening 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.

The Bank considers it crucial that short-term interest rates develop consistently with the level of interest rates determined by the Monetary Council in every sub-market and in every period. To this end, the MNB has been announcing daily FX swap tenders providing overnight foreign currency liquidity at an implied interest rate of 6 percent since 20 December. The 50-basis point increase in the Bank’s swap tenders and strong demand at discount bill auctions contributed to stable financial market developments at the end of last year in contrast to the turbulence in December in previous years. In the Council’s assessment, it is warranted to maintain an interest rate of 6 percent in the case of the FX swap instrument providing foreign currency liquidity.

The expected interest rate paths of major economies are surrounded by significant uncertainty. Risk aversion towards emerging markets and ongoing geopolitical tensions have increased upside risks to inflation in recent months. A careful and patient approach to monetary policy remains warranted. In the Council’s assessment, geopolitical tensions, a volatile financial market environment, and risks to 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 February 2025.

MAGYAR NEMZETI BANK
Monetary Council