22 September 2015
At its meeting on 22 September 2015, the Monetary Council reviewed the latest economic and financial developments and voted to leave the central bank base rate unchanged at 1.35%.
The Monetary Council’s statement on macroeconomic developments and its monetary policy assessment
The three-month, fixed-rate central bank deposit will be the Magyar Nemzeti Bank’s main policy instrument from 23 September 2015, replacing the two-week deposit facility. Consequently on its meeting of 22 September, the Monetary Council has made its policy decision on the interest rate on this facility. The three-month deposit facility will be available without limit, the maturity of the policy interest rate will be extended from two weeks to three months. The two-week central bank deposit will remain part of the Bank’s instruments; however, the facility will be offered at auctions, with quantity limits. Quantitative limits will be placed on the stock of two-week deposits first on 23 September 2015. Thereafter, the stock of deposits will fall gradually to the HUF 1,000 billion limit set by the end of the year.
In the Monetary Council’s assessment, persistently loose monetary conditions are consistent with the achievement of price stability.
In the Council’s assessment, the medium-term achievement of the Bank’s inflation target and a corresponding support to the real economy point in the direction of maintaining loose monetary conditions for an extended period. In addition to the primary goal of meeting the inflation target, the Council also takes into account the condition of the real economy and incorporates financial stability considerations into its decisions.
The performance of the global economy has continued to be subdued in recent months. Inflation around the world remains at low levels.
Significant differences remain across the individual regions in terms of economic growth. Of the world’s developed regions, growth in the euro area picked up slightly in the second quarter of 2015. The US economy grew strongly in the period. Most major emerging market economies are decelerating. Reflecting low crude oil and commodity prices as well as subdued demand environment, global inflation trends and inflationary pressure in the global economy are likely to remain moderate looking ahead. The monetary policy stance of globally influential central banks remained unchanged although continues to be different in recent months: the ECB and the Bank of Japan continued their asset purchase programmes, while the US Fed was preparing for the appropriate timing and magnitude of its interest rate increase postponed to a later date than the market had expected. Monetary conditions remain loose overall and, consequently, global interest rate and liquidity conditions continue to be supportive.
In the Council’s assessment, inflation is likely to be below the inflation target this year and next, and is expected to rise to levels around 3 per cent only in the second half of 2017.
The Council expects inflation to be significantly below the inflation target over the short term. According to data becoming available in recent months, the underlying trends were in line overall with the projection in the June issue of the Inflation Report. The difference between the projection and the actual outcome for the consumer price index was mainly accounted for lower fuel prices. Inflation is likely to develop firmly into positive territory towards the end of the year. Core inflation is likely to pick up gradually as costs increase continuingly and slowly from low levels and as a result of an expansion in domestic demand and rises in wages. However, the horizon over which the inflation target is expected to be achieved has been extended by around two quarters relative to the previous projection, due to the persistently low cost environment and slightly lower underlying inflation looking ahead, and therefore inflation is expected to rise to levels around 3 per cent only in the second half of 2017. The stabilisation of inflation expectations around the target is likely to support that price and wage-setting will be consistent with the inflation target over the medium term as domestic demand growth strengthens.
Domestic economic growth is likely to continue, supported by a gradual rise in both external and domestic demand.
Growth in the domestic economy has continued over recent period. Domestic demand is likely to make an increasing contribution to growth. Rising exports reflecting growth in Hungary’s export markets are also expected to support domestic economic growth. The improvement in the labour market and the low inflation environment contribute to household real income growth, which in turn is expected to facilitate the expansion in household consumption. The conversion of foreign currency loans reduces the household sector’s vulnerability, which may support the gradual easing of consumers’ precaution. Household investment activity is expected to strengthen over the forecast horizon, due to the pick-up in the housing market and the extension of the housing subsidy system. Lower transfers from the EU are likely to have an opposite effect on growth. Economic growth is expected to slow in early 2016 as EU transfers decline; however, economic performance is expected to improve from the second half of next year, supported by the improvement in lending activity and the resumption in EU funding. The negative output gap is expected to close at the end of the forecast horizon, and therefore it is likely to continue to have a disinflationary impact in the coming quarters.
The economy’s external vulnerability may continue to decrease.
Hungary’s external financing capacity increased further in early 2015, with the surpluses on foreign trade and the transfer balance continuing to be the major contributing factors. Looking at the structure of external financing, the outflow of debt liabilities continued, the effect of which was mitigated by a fall in interest rates and exchange rate revaluation due to the appreciation of the US dollar. As a result, the country’s external debt ratios remained broadly unchanged. Hungary’s external financing capacity is likely to remain strong over the forecast horizon, exceeding 9 per cent of GDP this year. Net exports are expected to rise further in 2015–2016, reflecting the positive impact on the terms of trade of the decline in oil prices and the favourable external demand. In 2016, the external financing capacity is likely to remain high, but is expected to fall slightly, due to lower transfers from the EU. The deficit on the income balance is likely to stabilise, reflecting the effect of the decline in interest expenses in addition to a declining debt trajectory and rising profits of companies as economic growth continues. In addition to the continuing very high level of net lending, the Bank’s self-financing programme and the conversion into forint of foreign currency loans are also likely to contribute to a further decline in the country’s external debt ratios.
Sentiment in international financial markets was volatile but unfavourable overall.
During the period developments related to Greek government debt problems, concerns over growth in emerging economies and China, disturbances in Chinese capital markets and uncertainty about the interest rate increase by the US Fed were the main factors contributing to the negative investor sentiment. Of the domestic measures of risk, the CDS spread has risen slightly, while long-term forint bond yields have fallen since the publication of the June Inflation Report. The forint has remained broadly unchanged against the euro in the past quarter. In the Council’s assessment, a cautious approach to monetary policy is still warranted due to uncertainty in the global financial environment.
The macroeconomic outlook is surrounded by both upside and downside risks.
The Monetary Council considered two alternative scenarios around the baseline projection in the September Inflation Report, which might influence significantly the future conduct of monetary policy. In the first alternative scenario, the persistently low cost environment and strengthening second-round effects pose an upside risk on economic growth and a downside risk on inflation. Consequently, the inflation target can be achieved with looser monetary conditions than assumed in the baseline projection. In the second alternative scenario, financial market turbulence leads to a sudden, sharp increase in the risk premium and a decline in external demand. For this alternative scenario, tighter monetary policy than assumed in the baseline projection ensures the achievement of the inflation target at the forecast horizon.
In the Council’s assessment, there continues to be a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate. The negative output gap is expected to close only gradually over the policy horizon.
In view of the projection in the September Inflation Report, the Monetary Council assesses that the current level of the base rate and maintaining loose monetary conditions for an extended period, over a longer horizon than expected, are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy.
The abridged minutes of today’s
Council meeting will be published at 2 p.m. on 7 October 2015.
MAGYAR NEMZETI BANK