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Press release on the Monetary Council meeting of 26 January 2016

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26 January 2016

At its meeting on 26 January 2016, 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, while core inflation was unchanged in December 2015. The Bank’s measures of underlying inflation continue to indicate moderate inflationary pressures in the economy. There has been a marked fall in oil prices recently. As a result, inflation may be lower over the short term than earlier expected. Core inflation is likely to rise 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.

In the third quarter of 2015, Hungarian economic growth continued at a weaker rate than in previous quarters. The decline in agricultural production and the moderation in industrial production dynamics were the main factors contributing to the deceleration. As in previous months, retail sales growth was stable in November, with their volume increasing across a wide range of products. Employment increased slightly and unemployment declined again after stagnating in the previous month. Slower growth in emerging markets and the deceleration in funding from the EU will lead to a slowdown in growth this year. A 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.

Overall, sentiment in global financial markets has deteriorated since the Council’s latest policy decision. In the second part of December, investor sentiment improved temporarily following the Fed’s interest rate decision. In January, risk indicators rose significantly in certain emerging countries in response to unfavourable macroeconomic data from China, the fall in the Chinese equity market and the significant drop in oil prices. At the end of the period, the European Central Bank’s communications affected investor sentiment favourably. Domestic financial markets remained stable even in the deteriorating investor environment. The forint exchange rate has appreciated and the domestic risk indicators have been mixed 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.

With the gradual phasing-out of the two-week central bank deposit facility, serving to ease monetary conditions, and with the more active use of central bank interest rate swaps, a set of instruments effectively supporting the monetary policy objectives will be developed. Long-term government securities yields fell after the announcement of Phase 3 of the Self-Financing Programme and are likely to continue declining as the announced measures are implemented. The Monetary Council constantly monitors whether the resulting looser monetary conditions ensure the sustainable achievement of the inflation target. In this context, the Council closely examines developments in the foreign monetary environment, particularly the measures of the European Central Bank. If the Monetary Council considers it necessary, further monetary loosening will be implemented, primarily using the existing unconventional tools.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 10 February 2016.

MAGYAR NEMZETI BANK

Monetary Council

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