Press release on the Monetary Council meeting of 26 March 2024

26 March 2024

At its meeting on 26 March 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 27 March 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 outlook for economic growth in Europe is still exposed to downside risks, which is further exacerbated by the generally tense geopolitical situation.

Inflation in the euro area fell further in February; however, the rapid disinflation seen earlier slowed. In February, inflation in the US was slightly above the figure seen in the previous month and expectations. Looking ahead, weakening global economic demand and lower commodity prices compared to previous years continuously suggest moderate inflation rates. However, the Red Sea conflict may cause disruptions in global value chains, leading to a renewed rise in freight costs. Oil prices hovered around USD 85, while European gas prices rose slightly from low levels over the past month.

International risk appetite has been volatile since the February 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 developments related to the conflicts in the Middle East. In the case of the Federal Reserve and the European Central Bank, expected interest rate paths, based on market pricings, shifted upwards relative to the beginning of the year, which was accompanied by rises in long-term yields in developed markets in the first months of 2024. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points, while the Polish central bank left monetary conditions unchanged in March.

Following the downturn in 2023, a slow recovery began at the beginning of 2024. Economic growth in Hungary may accelerate in the second half of the year. In the first month of 2024, construction output showed double-digit growth in annual terms, while industrial production declined. The volume of retail sales increased slightly in January, breaking the decline in the previous thirteen months. As regards the main determinants of household consumption, real wages rose in 2023 Q4, while slow improvement in consumer confidence indicator suggests gradual easing of the precautionary motive. Labour market tightness has eased over the past months. With a high level of employment, the unemployment rate rose slightly to 4.5 percent in January.

In 2024, with persistently moderating inflation, continuously rising real wages and strengthening confidence, the gradual expansion in Hungary’s GDP will be mainly supported by domestic demand components. Export performance is affected by opposing trends. Persistently weak European economic activity is holding back domestic exports, but ongoing and newly announced, significant capacity-enhancing foreign direct investment projects are stimulating them over time. Reflecting weak demand in external markets, the Bank’s expectation for this year is lower overall compared to the December projection and is consistent with a growth path of 2.0–3.0 percent. With the pick-up in the production of new export capacities built recently, a balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase. Hungary’s GDP is expected to rise by 3.5–4.5 percent in 2025 and by 3.0–4.0 percent in 2026.

Disinflation is strong and general in the Hungarian economy. In February, consumer prices rose by 3.7 percent in annual terms, and as a result, inflation was within the Bank’s tolerance band again. The consumer price index fell by 0.1 percentage points compared to the previous month. Within this, the contribution of tradables and food prices to disinflation was offset by the upward effects on inflation by fuel prices. Fuel prices increased by 6.7 percent on a monthly basis, mainly due to the delayed appearance of price increasing effect of the rise in excise duties, effective from 1 January. Core inflation eased by 1.0 percentage point to 5.1 percent in annual comparison. Inflation and core inflation were lower compared to the middle value in the December Inflation Report projection. The annualised three-month change in core inflation has been below 3 percent since October 2023. Household inflation expectations have fallen in recent months.

The pace of price increases will temporarily rise in Hungary in the middle of this year due to the backward-looking pricing of market services and base effects. In addition, underlying developments will be shaped by two opposing effects. The weakening of the forint exchange rate in recent weeks points to a rise in imported inflation. On the other hand, the weaker cyclical position of the domestic real economy in the short term has a disinflationary impact. As a result of these two effects, the decline in core inflation, capturing underlying developments, will stop in the second quarter and it is expected to fluctuate between 4.5 and 5.0 percent in the remainder of the year. Annual inflation is expected to be between 3.5 and 5.0 percent this year, indicating lower inflation path compared to the December projection. According to the projection of the MNB, inflation may be between 2.5 and 3.5 percent in 2025 and 2026. Anchoring inflation expectations, preserving financial market stability and the disciplined monetary policy are crucial for the consumer price index to return into the central bank tolerance band on a sustained manner from next year.

In 2023, the annual current account balance turned to slight surplus, improving by over 8 percentage points due to lower energy prices, the adjustment of energy consumption and a decline in domestic demand. In January, the current account deficit fell significantly compared to the levels seen in the previous month and a year earlier. Taking into account data showing sharp fluctuations in November and December 2023, the figure in January is consistent with the fact that the current account has been close to equilibrium in recent months.

Exports and imports are expected to grow at nearly the same rate this year, and as a result, the improvement in the trade balance will be driven mainly by an improvement in the terms of trade due to lower energy prices. Overall, the current account balance as a share of GDP is expected to improve slightly in 2024 and to a greater extent in the coming years in parallel with an increase in Hungary’s export market share. As a result, the current account surplus will continue to rise over the forecast horizon.

Based on preliminary financial accounts data, the accrual-based deficit of general government was 6.7 percent of GDP in 2023. According to the MNB’s projection, the government deficit may decline in 2024 compared to 2023. Based on preliminary data, gross government debt fell to 73.4 percent of GDP by the end of 2023. For the debt ratio to decline continuously in 2024 and Hungary’s risk perception to improve, it is also necessary to achieve the set deficit targets in a credible manner.

The Monetary Council highlighted three alternative scenarios around the baseline projection in the March Inflation Report. In the scenarios which assume deceleration in global economic activity and a slower recovery in consumption, both economic growth and inflation may be lower compared to the baseline. In the third alternative scenario, as a result of the slowdown in global disinflation, the monetary policies of the world’s leading central banks may remain tight for longer than in the baseline scenario.

Over the past few months, disinflation in the Hungarian economy has been stronger than expected, while external and domestic demand pressures have remained persistently low. However, in the volatile international sentiment, the risk premium on Hungarian assets has also risen recently. According to the assessment of the Monetary Council, the continued strong and general disinflation allows a further reduction in the base rate, while the increasing financial market risk aversion justifies a slower pace than in February. In line with this, at its meeting today, the Monetary Council cut the base rate by 75 basis points to 8.25 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 7.25 percent, while the upper bound, i.e. the O/N lending rate, will be lowered to 9.25 percent. Monetary policy continues to contribute to the maintenance of financial market stability, the continuation of disinflation and the achievement of the inflation target by ensuring positive real interest rates.

From the perspective of monetary transmission, the Bank considers it crucial that short-term interest rates develop consistently with levels of short-term rates deemed optimal by the Monetary Council in every sub-market and in every period, paying special attention to developments in FX swap market at the end of the quarter. The MNB ensures the maintenance of financial market stability using two instruments with maturity extending beyond the end of the quarter: T/N FX swap tenders announced on a daily basis, and weekly discount bill auctions.

Risks surrounding global disinflation, volatility in international investor sentiment and the temporary rise in domestic inflation, expected in the middle of the year, warrant a careful approach to monetary policy in the coming months. 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 10 April 2024.

MAGYAR NEMZETI BANK
Monetary Council