20 November 2018
At its meeting on 20 November 2018, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 21 November 2018:
|Central bank instrument
|Previous interest rate (percent)
|Change (basis points)
|New interest rate (percent)
|Central bank base rate
|O/N deposit rate
|Central bank base rate minus 1.05 percentage points
|O/N collateralised lending rate
|Central bank base rate plus 0.00 percentage points
|One-week collateralised lending rate
|Central bank base rate plus 0.00 percentage points
In the Council’s assessment, in parallel with the pick-up in domestic demand Hungarian economic output is close to its potential level. Growth of the Hungarian economy will pick up further in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019. The inflation target is still expected to be achieved in a sustainable manner from mid-2019.
The Magyar Nemzeti Bank’s (MNB) single anchor is inflation. Under the flexible inflation targeting regime, the Monetary Council takes account of all factors influencing inflation developments on the five to eight-quarter horizon of monetary policy. These may include developments in commodity prices, changes in the external inflation environment, labour market conditions, the position of the real economy, developments in the exchange rate and credit market conditions. By taking into account all these factors, the Bank is able to assess the likely magnitude and persistence of future price changes, which in turn determine the monetary policy response.
In October 2018, inflation rose to 3.8 percent and core inflation to 2.6 percent. Primarily the sharp rise in volatile items, particularly fuel and unprocessed food prices, moreover the faster-than-expected pass-through of the increase in excise taxes on tobacco products were the main factors contributing to the pick-up in inflation during the autumn months. In October, the measures of underlying inflation rose, mainly reflecting an increase in tradables prices. Difference between the consumer price index and the measures of underlying inflation remained significant. Inflationary pressures from wages continued to be moderate. Oil prices have fallen since the previous interest rate decision. According to the European Central Bank’s (ECB) projection, underlying inflation will continue to be moderate in the euro area in the coming years as well.
Inflation is expected to decrease but remain slightly above 3 percent in the final two months of the year. Difference between the inflation rate and the measures of underlying inflation will narrow towards the end of the year. Inflation is expected to decrease in the coming months due to the fall in fuel prices, while the measures of underlying inflation are likely to rise. Inflation expectations remain anchored at low levels. Rising consumption according to the September projection leads to a gradual increase in underlying inflation. This will ensure that inflation meets the 3 percent target in a sustainable structure from mid-2019.
According to preliminary data, the Hungarian economy grew strongly, by 4.8 percent in the third quarter of 2018 relative to a year earlier. Labour demand remains strong. The unemployment rate stayed close to its historically low level. Lending to the corporate and household sectors continued to expand in September; however, the proportion of long-term, fixed-rate lending to the corporate sector continues to be low.
Looking ahead, economic growth is expected to continue across a broad range of sectors. The general strengthening of domestic demand will continue to play a central role in economic output developments. In the Council’s assessment, GDP growth will pick up and stand at 4.4 percent in 2018, then, if the assumptions of the current projection hold, it will slow down gradually from 2019. Meanwhile, the country’s current account balance is expected to remain in positive territory over the longer term as well.
Sentiment in international financial markets has been volatile in the period since the Council’s previous interest rate decision. News about international trade policies, Italy’s government budget and the slowdown in global economic growth were the main factors influencing investors’ appetite for risk. The current volatile international environment continues to suggest a more cautious approach. The Bank assesses these developments in light of their relevance to its primary objective, i.e. the sustainable achievement of the inflation target, focusing on their persistence. According to market expectations monetary conditions in the euro area remain loose. The ECB’s decisions may have a significant influence on the Magyar Nemzeti Bank’s monetary policy.
The Bank’s primary objective is to achieve the inflation target in a sustainable manner. For this reason, in the Council’s assessment, maintaining the loose monetary conditions is necessary. Consistent with the practice of leading central banks, the MNB is also prepared for the gradual and cautious normalisation of monetary policy. As part of the instrument strategy presented in September, the Monetary Council will phase out the three-month deposit facility by the end of 2018. In the future, required reserves will be the main policy instrument. Looking forward, the Bank will adjust monetary conditions necessary to achieve the inflation target in a sustainable manner by creating an optimal combination of two of its instruments: the stock of swap instruments providing forint liquidity and the interest rate corridor. As part of the fine-tuning of the unconventional policy instruments affecting long-term yields, mortgage bond purchases in the secondary market ended, consistent with the Council’s September decision. In addition, the mortgage bond purchase programme in the primary market will be completed and the monetary policy IRS instrument will be phased out by the end of 2018. Furthermore, the Monetary Council will launch the Funding for Growth Scheme Fix at the beginning of 2019. The MNB will sterilise the liquidity provided under this programme using a preferential deposit facility bearing interest at the central bank base rate.
In order to maintain the loose monetary conditions, the Monetary Council held the base rate, the overnight collateralised lending rate and the one-week collateralised lending rate at 0.9 percent and the overnight deposit rate at -0.15 percent. In addition, in September the Council left the average amount of liquidity to be crowded-out for the fourth quarter of 2018 unchanged, at least at HUF 400-600 billion. On the next occasion, in December 2018, the Council will decide on the amount of liquidity to be crowded out and will take this into account in setting the stock of central bank swap instruments.
The Council is prepared for the gradual and cautious normalisation of monetary policy, which will start depending on the outlook for inflation. The inflation target is still expected to be achieved in a sustainable manner from mid-2019. To ensure this, in the Council’s assessment, maintaining the current level of the base rate and the loose monetary conditions is necessary.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 December 2018.
MAGYAR NEMZETI BANK