Press release on the Monetary Council meeting of 23 July 2019

23 July 2019

At its meeting on 23 July 2019, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 24 July 2019:

The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. The factors determining inflation continue to show volatility. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends. Consistent with the MNB’s expectations, the pace of increase in domestic consumer prices started to slow down in the summer months. In June 2019, inflation, core inflation and core inflation excluding indirect tax effects fell to 3.4 percent, 3.8 percent and 3.5 percent, respectively. Incoming data confirm the baseline projection in the June Inflation Report.

A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and, from the second half of the year, weakening external activity is likely to restrain the pace of price increase. Due to a strengthening of external disinflationary effects, core inflation excluding indirect tax effects is likely to decline gradually to 3 percent from the end of 2019. The increase of excise duty on tobacco products on a six-monthly basis, which is outside the scope of monetary policy, is likely to raise the consumer price index over the entire forecast horizon. This measure does not cause any second-round effects, consequently, does not influence changes in core inflation excluding indirect tax effects.

The Hungarian economy grew by 5.3 percent in the first quarter of 2019, mainly driven by market services, industry and construction. Based on monthly indicators, growth rate in retail sales and construction slowed in the second quarter. In line with our expectations, incoming data suggest that the dynamics of GDP growth is likely to slow down gradually from the second quarter. Compared to the previous high levels, wage growth continued at a slightly weaker rate in April. Labour demand remained strong, and the unemployment rate was close to its historically low level. The current account remained in surplus in the first quarter of 2019. Due mainly to dynamic growth in imports, the trade surplus declined in recent quarters, primarily reflecting strong investment activity in the corporate sector.

Economic growth is expected to slow gradually from the middle of the year, but to remain strong. Subdued economic activity in Europe from the second half of the year is also reflected in the slowdown of growth in Hungary. The Hungarian economy is expected to grow by 4.3 percent in 2019 and by 3.3 percent in 2020. As a result of further dynamic growth in credit markets, the investment rate is likely to continue to rise and stabilise at high levels in the coming years. Regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.

In addition to monetary policy, the new retail government security strategy, the 2020 Budget Act and the provisions of the Economy Protection Action Plan to improve competitiveness, are aimed at further strengthening macroeconomic stability and sustainable convergence. The Hungarian Government Security Plus, introduced in June, is expected to raise households’ savings rate, in addition to the structural change of their financial assets. Consequently, an increasing share of rapid wage growth is converted into savings instead of consumption, while the promotion of self-financing also helps to reduce Hungary’s external vulnerability. Following its launch on 1 June, the outstanding amount of Hungarian Government Security Plus rose by over HUF 1,200 billion. More than half of this amount was registered as a new source of finance for the government sector. Based on the 2020 Budget Act, the budget deficit-to-GDP ratio is likely to decline to 1 percent, with the maintenance of a significant amount of reserves. After 2019, fiscal policy will remain counter-cyclical in 2020 as well. The announced Economy Protection Action Plan is expected to gradually improve the competitiveness of the domestic economy. The above measures jointly strengthen macroeconomic stability, reduce external vulnerability, and contribute to maintain a sustainable convergence path.

Due to uncertainties related to the outlook for global economic activity, monetary policies across the world’s leading central banks continue to be increasingly cautious. Consistent with the downside risks related to economic activity in Europe and the euro area and communications from the European Central Bank (ECB), market participants are pricing in the loosening of monetary conditions over the short term. According to market expectations, the Federal Reserve may reduce the policy rate in more than one step in 2019, while the Bank of Japan is likely to maintain its loose monetary policy for a longer period of time than earlier expected.

Sentiment in international financial markets has slightly improved since the Council’s previous interest rate decision. Risk appetite was influenced by developments in international trade policies, incoming macroeconomic data and measures taken by the world’s leading central banks. Oil prices have decreased in the last month.

To improve the effectiveness of monetary policy transmission, the Monetary Council launched its corporate bond purchasing programme with a total amount of HUF 300 billion on 1 July 2019. By introducing the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of funding to the domestic corporate sector. Corporate bond issuances are expected to take place in the fourth quarter. The MNB will neutralise excess liquidity arising from bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019 to build a healthier lending structure. Under the scheme, participating credit institutions concluded loan contracts with domestic SMEs totalling nearly HUF 175 billion in the first half of 2019.

The Monetary Council left the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.05 percent unchanged. In addition, in June, the Council set the average amount of liquidity, to be crowded out for the third quarter, at least at HUF 200-400 billion and will take this into account in setting the stock of central bank swap instruments. The MNB is ready to change the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council, and the volatility of interbank rates remains at low levels.

In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will remain favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and, from the second half of the year, weakening external activity is likely to restrain the pace of price increase. Regarding the outlook for inflation, data to be received in the second half of the year will be decisive. Of these, the following are of key importance: the spillover of disinflationary effects of slowing European economic activity, changes in monetary policies of the world’s leading central banks, the effect of the new retail government security on savings, and the economic consequences of counter-cyclical fiscal policy. The Monetary Council will assess their effects on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Council applies a cautious approach, relying mainly on the comprehensive projections for the macroeconomy and inflation of the quarterly published Inflation Report. The future developments in the outlook for inflation will be a decisive factor in the necessity of further measures.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 August 2019.

MAGYAR NEMZETI BANK

Monetary Council