15 December 2015

At its meeting on 15 December 2015, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 1.35%.

In the Council’s assessment, Hungarian economic growth continues. A degree of unused capacity remains in the economy, and therefore the domestic real economic environment continues to have a disinflationary impact. Inflation remains substantially below the Bank’s target.

The annual inflation rate increased slightly and core inflation was broadly unchanged in November 2015. The Bank’s measures of underlying inflation continue to indicate moderate inflationary pressures in the economy. Core inflation has been rising gradually as a result of an expansion in household consumption and an acceleration in wage growth, but the persistently low global inflationary environment contains the increase in the domestic consumer price index. Inflation expectations fell to a historic low. Inflation is expected to remain below the 3 per cent target over the forecast period, and is only likely to approach it by the end of the forecast horizon.

Hungarian economic growth continued at a weaker-than-expected rate in the third quarter of 2015. The decline in agricultural production and the moderation of industrial production dynamics were the main contributing factors to the deceleration. As in previous months, retail sales were stable in October, with their volume increasing across a wide range of products. Employment and unemployment were broadly unchanged. The deceleration in external demand and in funding from the EU will lead to a significant slowdown in growth in 2016. Recovery is expected from the second half of 2016, mainly reflecting the strengthening performance of Hungary’s export markets as well as the Bank’s and the Government’s policy measures. In the Council’s assessment, the Bank’s Growth Supporting Programme and the recent steps taken by the Government to encourage home building are expected to dampen the slowdown in the rate of growth. In addition to these factors, rising household consumption is likely to support the economic expansion in the coming years.

Sentiment in global financial markets has been volatile in the previous month, deteriorating significantly during the last week. Over the period, the main factors affecting appetite for risk were the ECB’s communication suggesting that it would adopt a looser monetary policy stance and its policy decision, continued uncertainty about an interest rate increase by the Fed, and concerns over growth prospects in emerging economies. Conditions in Hungarian financial markets were mostly influenced by international factors. The forint exchange rate has weakened and Hungary’s CDS spread has been broadly unchanged in the period since the previous policy decision. Hungary’s persistently strong external financing capacity and the resulting decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.

Market yield expectations were in line with the Bank’s forward guidance that the base rate would be held constant over an extended period. The unconventional, targeted monetary policy instruments introduced by the Bank also facilitate a decline in long-term yields and, consequently, a loosening in monetary conditions. Forward-looking money market real interest rates are in negative territory and are declining even further as inflation rises.
In the Council’s assessment, the reduction in unused capacity is stopping temporarily as economic growth slows, and therefore the negative output gap will close only at the end of the policy horizon. Inflationary pressures remain moderate over a sustained period. If the assumptions underlying the Bank’s projections hold, the current level of the base rate and maintaining loose monetary conditions for an extended period, over the entire forecast horizon, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.

Under current conditions, the Monetary Council wishes to achieve the inflation target in a sustainable way by holding the base rate unchanged for an extended period and by using unconventional, targeted monetary policy instruments, as these contribute efficiently to the further loosening in monetary conditions, particularly to the decline in long-term yields. The Council examines thoroughly the range of potentially applicable tools.

The Magyar Nemzeti Bank’s Monetary Council has decided that, beginning from December 2015, it will issue shorter-form press releases following its policy meetings in the months of publication of the Inflation Report, in order to facilitate comparison of monthly press releases. The press releases will have the same format as those issued monthly between Inflation Reports. During the discussion of the decision, the Council also considered the December 2015 Inflation Report.

In parallel, the Council’s statements published previously in the Inflation Reports’ months will be transformed into an introductory chapter of the Inflation Report, describing the Council’s assessment of macroeconomic conditions entitled ‘The Monetary Council’s key findings’, which will be first published in the December Report on 17 December 2015.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 23 December 2015.

Monetary Council