Press release on the Monetary Council meeting of 22 October 2019

22 October 2019

 At its meeting on 22 October 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 23 October2019:

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 September 2019, inflation, core inflation and core inflation excluding indirect tax effects stood at 2.8 percent, 3.9 percent and 3.4 percent, respectively. Declines in the price indices for unprocessed food and fuel contributed to the moderation in headline inflation. The increase in the core inflation measures in September reflected the rise in telecommunication sector prices, which exceeded regional dynamics.

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 significantly lower-than-expected core inflation excluding indirect tax effects over the summer months and 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 rise slightly, before decreasing to 3 percent along a lower than previously expected path, due to external disinflationary effects.

The Hungarian economy grew by 4.9 percent in the second quarter of 2019. Over the summer months, production growth in industry and construction slowed, while the volume of retail sales continued to expand dynamically. Labour demand remained strong, and the unemployment rate was close to its historically low level. Due to dynamic import growth, the trade surplus has declined in recent quarters, primarily reflecting strong investment activity in the corporate sector.

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 the Hungarian economy with the euro area 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 amount of the Hungarian Government Security Plus purchased continued to be considerable, more than half of which was registered as a new source of financing for the government sector. The significant part of sales was related to 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. The Federal Reserve has reduced its policy rate twice in this year. At its policy meeting in September, the European Central Bank announced a comprehensive package of easing measures. According to global leading central banks’ indications and analysts’ expectations, a looser monetary policy environment will be persistently maintained, and additional loosening measures can be expected.

Sentiment in international financial markets has been volatile since the Council’s previous policy decision. Risk appetite was influenced by developments in international trade policies, the intensification of concerns related to the slowdown in global growth, the geopolitical tensions in the Middle East and the events related to Brexit. The oil prices have decreased over the past month.

To improve the effectiveness of monetary policy transmission, the Monetary Council launched its corporate bond purchasing programme with a total amount of HUF 300 billion on 1 July 2019. Under the programme, the MNB started purchases in September, accompanied by great interest. 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 270 billion until the end of September.

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 6 November 2019.

MAGYAR NEMZETI BANK

Monetary Council