19 November 2019
At its meeting on 19 November 2019, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 20 November 2019:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||0.90||No change||0.90|
|O/N deposit rate||Central bank base rate minus 0.95 percentage points||-0.05||No change||-0.05|
|O/N collateralised lending rate||Central bank base rate plus 0.00 percentage points||0.90||No change||0.90|
|One-week collateralised lending rate||Central bank base rate plus 0.00 percentage points||0.90||No change||0.90|
The Magyar Nemzeti Bank’s (MNB) single anchor is inflation, its primary objective is to achieve and maintain price stability. Inflation continues to be volatile. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends.
In October 2019, inflation, core inflation and core inflation excluding indirect tax effects stood at 2.9 percent, 4.0 percent and 3.7 percent, respectively. The increase in headline inflation and core inflation in October reflected changes in the price index for processed food.
A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation. The effects of the slowdown in European economic activity indicate a strengthening in downside risks to the longer-term outlook for inflation. Due to the base effects of the fall in fuel prices last year, the consumer price index is likely to rise again until the end of 2019, and then to stabilise at the level of the 3 percent inflation target following a gradual decline. In the coming months, core inflation excluding indirect tax effects is expected to remain close to its current level, before decreasing gradually to 3 percent from the beginning of the next year, due to external disinflationary effects.
Based on the preliminary data release, the Hungarian economy grew by 5.0 percent in the third quarter of 2019, mainly driven by market services, industry and construction. Labour demand remained strong, and the unemployment rate was close to its historically low level. With dynamic export growth, in the last quarter, the trade surplus exceeded significantly its value one year earlier.
Economic growth is expected to slow in the coming quarters. Weakening economic activity in Europe is likely to have an increasingly strong effect on developments in Hungarian GDP as well. Consistent with the gradual deceleration in economic growth, the increase in wages is likely to slow. In parallel, the growth rate of consumption is also likely to slow down. Hungary’s export growth may be more muted, reflecting the deterioration in the global and European demand outlook. Hungary’s GDP is expected to grow by 4.5 percent in 2019 and by 3.3 percent in 2020 and 2021, respectively. Despite weakening external activity, the convergence of Hungary with the euro area economy is likely to continue in the coming years, with the maintenance of the at least 2 percentage-points growth rate surpluses.
In addition to monetary policy, several government measures jointly strengthen Hungary’s macroeconomic stability and reduce external vulnerability. The Hungarian Government Security Plus (MÁP+) strengthens financial stability and supports sustainable economic growth through several channels. The amount of securities purchased continued to be considerable, more than half of which was registered as a new source of financing for the government sector. A significant part of sales was located in the capital, while the level of purchases was lower in the rest of the country. Based on the ratified 2020 Budget Act, the budget deficit-to-GDP ratio is likely to decline from 1.7-1.8 percent in the current year to 1 percent, with the maintenance of a significant amount of reserves. After 2019, fiscal policy will remain counter-cyclical in 2020 and, in line with the Convergence Programme, in 2021 as well. The Economy Protection Action Plan announced in May is expected to gradually improve the competitiveness of the domestic economy.
As result of the deterioration in the global economic outlook and subdued inflation, the external monetary policy environment has become looser again in recent months. The Federal Reserve has reduced its policy rate three times in this year. In line with its September decision, the European Central Bank has begun asset purchases in November. In October, the possibility of a reduction in interest rates appeared in the Bank of Japan’s forward guidance. According to global leading central banks’ indications and market pricing, a loose monetary policy environment will be persistently maintained, and additional moderate loosening measures can be expected.
Sentiment in international financial markets has improved since the Council’s previous policy decision. Risk appetite was influenced by developments in international trade policies, decisions of the world’s leading central banks and the events related to Brexit. The oil prices have risen over the past month.
To improve the effectiveness of monetary policy transmission, the Monetary Council launched its Bond Funding for Growth Scheme with a total amount of HUF 300 billion on 1 July 2019. Under the Scheme, the MNB started corporate bond purchases in September. Due to great interest, three-quarters of the amount available under the Scheme is expected to be used until the end of 2019, with the remaining part likely to be used early next year. The MNB will neutralise excess liquidity arising from bond purchases by using the preferential deposit facility bearing interest at the central bank base rate. The programme complements the Funding for Growth Scheme Fix launched at the beginning of 2019 to build a healthier lending structure. Under the scheme, participating credit institutions concluded loan contracts with domestic SMEs totalling more than HUF 310 billion until the end of October.
The Monetary Council left 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 -0.05 percent unchanged. In addition, in September the Council set the average amount of liquidity to be crowded out for the fourth quarter at least at HUF 300-500 billion and will take this into account in setting the stock of central bank swap instruments. The MNB changes the stock of the FX swap instrument in a flexible manner to ensure that the interest rate transmission changes in line with the decisions by the Monetary Council and the volatility of interbank rates remains at low levels.
In its decisions, the Monetary Council focuses on the maintenance of price stability. The monetary policy stance will continue to be accommodative, economic agents’ financing costs will be favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, while weakening external activity is increasingly restraining the pace of inflation.
In the Monetary Council’s assessment, previously symmetric risks to inflation became asymmetric in the last quarter. The downside inflation risks have strengthened further, reflecting the effects of the slowdown in European economic activity. Due to the measures taken by global leading central banks, the external monetary policy environment has become looser. The Council will assess the effects of these factors on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Monetary Council applies a cautious approach, relying mainly on the incoming data and the projections in the quarterly published Inflation Report. Future developments in the outlook for inflation will be a decisive factor in the necessity of further measures.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 4 December 2019.
MAGYAR NEMZETI BANK