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Press release on the Monetary Council meeting of 25 October 2016

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25 October 2016

At its meeting on 25 October 2016, the Monetary Council reviewed the latest economic and financial developments and voted on the following structure of central bank interest rates with effect from 26 October 2016:

Central bank interest rate

Previous interest rate (per cent)

Change (basis points)

New interest rate (per cent)

Central bank base rate

0.90

No change

0.90

Overnight collateralised lending rate

1.15

-10

1.05

Overnight deposit rate

-0.05

No change

-0.05

In the Council’s assessment, Hungarian economic growth continues to pick up from the middle of the year following the temporary slowdown at the beginning of 2016. There continues to be a degree of unused capacity in the economy and inflation remains persistently below the Bank’s target. Looking ahead, the disinflationary impact of the domestic real economic environment is gradually decreasing.

As the Monetary Council expected, inflation rose again into positive territory in September 2016. The Bank’s measures of underlying inflation continue to indicate a moderate inflationary environment in the economy. Persistently low global inflation is restraining the pace of increase in domestic consumer prices. Inflation expectations are at historically low levels. Whole-economy wage growth remains strong, which is likely to raise core inflation gradually through rising household consumption. Inflation remains below the 3 per cent target over the forecast period, and only gets close to it by the middle of 2018.

Hungarian economic growth accelerated in the second quarter of 2016, and, based on monthly indicators, it picked up further in the third quarter, in line with the Bank’s expectations. The robust expansion in retail sales continued in August. Further growth is expected in household consumption in the coming quarters. Industrial production increased strongly in August. This growth following the decline in previous months is primarily due to the rise in vehicle industry output. Labour demand remained strong, and therefore the number of employees increased again, while the unemployment rate fell further. Both corporate and household lending increased in August. New household loans exceeded repayments for the first time since the crisis. The time profile of this year’s economic growth is characterised by duality. Following temporary slow growth at the beginning of the year, the pick-up in domestic demand, the extension of the Funding for Growth Scheme, the Growth Supporting Programme, the easing measures of monetary policy as well as the Government’s measures will help achieve economic growth of around 3 per cent.

Sentiment in global financial markets has been volatile since the Council’s latest interest rate-setting decision, mainly driven by news related to the oil market and the stability of some European banks as well as by expectations about monetary policy actions by the world’s leading central banks. The forint appreciated against the euro, and short-term money market rates and government securities yields fell overall. Hungary’s strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. Forward-looking domestic money market real interest rates are in negative territory and are declining even further as inflation rises. However, in the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.

At its meeting in September, the Monetary Council set a HUF 900 billion upper limit on the 2016 year-end stock of three-month central bank deposits, which according to the Council’s expectation means the crowding out of at least HUF 200–400 billion liquidity from the deposit facility. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of monetary policy instruments. At its meeting today, the Monetary Council decided to lower the required reserve ratio for banks from 2 per cent to 1 per cent, effective from 1 December 2016. As a result, freely available liquidity of the banking system will expand further by HUF 170 billion. The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates. The Monetary Council is making every effort to ensure that the limit imposed on the stock of three-month deposits exerts its expected easing effect efficiently.

The Monetary Council decided to leave the base rate unchanged. In order to increase the banking system’s liquidity and ease monetary conditions further, the Council reduced the overnight lending rate by 10 basis points to 1.05 per cent while leaving the overnight deposit rate unchanged at -0.05 per cent. As a result, the interest rate corridor narrowed further. In accordance with this, the interest rate on the one-week central bank loan fell by 5 basis points to 1.00 per cent.

In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflation remains moderate for an extended period. The disinflationary impact of the real economy is gradually decreasing over the policy horizon. If the assumptions underlying the Bank’s projections hold, maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Magyar Nemzeti Bank closely monitors developments in monetary conditions and markets. If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 9 November 2016.

MAGYAR NEMZETI BANK

Monetary Council

Budapest, 25 October 2016