Press release on the Monetary Council meeting of 24 January 2017

24 January 2017

At its meeting on 24 January 2017, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 25 January 2017:

In the Council’s assessment, Hungarian economic growth continues to pick up. Some degree of unused capacity has remained in the economy, but looking ahead, the disinflationary impact of the domestic real economic environment is gradually dissipating. Inflation rises over the forecast period and reaches the inflation target in the first half of 2018.

Due in part to base effects, inflation rose further in December 2016 and was in line with the Bank’s expectations. The Bank’s measures of underlying inflation remained broadly unchanged. Whole-economy wage growth is likely to remain strong, as a result of continued strong demand for labour and the wage agreement at the end of last year. According to our expectations, to a smaller extent, this leads to higher core inflation and to a greater extent, to a reduction in the trade surplus through an expansion in household consumption. With historically low inflation expectations, the consumer price index approaches the inflation target only slowly, and is projected to reach the 3 per cent level consistent with price stability in the first half of 2018.

According to monthly indicators, Hungarian economic growth continued in the fourth quarter of 2016. In November, the volume of retail sales increased further and industrial production rose slightly relative to the same period a year earlier. Outstanding lending to small and medium-sized companies increased by around 7 per cent in the third quarter and the stock of corporate loans has already started to rise on the year-on-year comparison. The turnaround in household lending experienced last year has proved lasting. Labour demand remained strong, and therefore the number of employees increased and the unemployment rate fell further. In parallel with continued strong wage growth at the end of last year, household consumption is expected to grow further, which will be supported by the realisation of consumption deferred from previous years as well. Hungary’s current account surplus is expected to fall to nearly a half of its 2016 level over the forecast horizon, driven by rising domestic demand. The Monetary Council expects annual economic growth of over 3 per cent both this year and the next, to which the Bank’s and the Government’s measures to stimulate economic growth contribute substantially.

Global financial markets have been calm overall since the Council’s latest interest rate-setting decision and risk indicators have fallen slightly, although there have been significant tensions in some emerging economies. The US Fed and the ECB made decisions in diverging policy directions in December. As expected, the Fed decided to raise interest rates and, looking ahead, moved towards a tighter policy path. By contrast, the ECB decided to extend its quantitative easing programme. According to data published since then, inflation rose in developed regions over the past month. This trend, if it persists, may pose a new challenge to the central banks of those economies.

The majority of developed market equity indices rose slightly and movements in yields on long-term government securities were mixed. The forint appreciated against the euro. In the domestic government securities market, yields at maturities of up to one year fell and those at longer maturities rose. The amount of liquidity crowded out following the introduction of an upper limit on the stock of three-month deposits has had a marked influence on money market rates. As a consequence, the three-month BUBOR has dropped to a historical low level of 30 basis points and forint yields in the FX swap market have also fallen sharply.

Hungary’s strong external financing capacity and the decline in external debt are contributing to the sustained reduction in the vulnerability of the economy. Forward-looking domestic money market real interest rates have fallen substantially over recent years and are expected to remain in negative territory for a prolonged period. In the Council’s assessment, a watchful approach to monetary policy is still warranted due to uncertainty in the global financial environment.

At its meeting in December 2016, the Monetary Council set a HUF 750 billion upper limit on the stock of three-month central bank deposits as at the end of the first quarter of 2017. The Monetary Council expects that this decision will mean the crowding out of at least HUF 100-200 billion additional liquidity from the deposit facility. The Council considers the limit on the three-month deposit stock and its potential future change an integral part of monetary policy instruments. The Bank aims to ease monetary conditions and provide a corresponding degree of support to the economy through a decline in money market rates. The Monetary Council intends to ensure that the limit imposed on the stock of three-month deposits exerts its expected easing effect efficiently. The limit is set quarterly. On the next occasion, a decision on its level as at end of the second quarter of 2017 will be made in March 2017.

In the Council’s assessment, some degree of unused capacity has remained in the economy while inflation is rising gradually to the target. The disinflationary impact of the real economy is gradually dissipating over the policy horizon. If the assumptions underlying the Bank’s projections hold, maintaining the current level of the base rate for an extended period and the loosening of monetary conditions by the change in the monetary policy instruments are consistent with the medium-term achievement of the inflation target and a corresponding degree of support to the economy. The Magyar Nemzeti Bank monitors developments in monetary conditions and markets. If subsequently warranted by the achievement of the inflation target, the Council will stand ready to ease monetary conditions further using unconventional, targeted instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 8 February 2017.

MAGYAR NEMZETI BANK

Monetary Council