27 August 2019
At its meeting on 27 August 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 28 August 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. The factors determining inflation continue to show volatility. Therefore, in assessing the outlook, the Monetary Council pays more attention to the measures of underlying inflation capturing persistent trends.
Consistent with the MNB’s expectations, the annual consumer price index started to decline in the summer months. In July 2019, inflation, core inflation and core inflation excluding indirect tax effects fell to 3.3 percent, 3.7 percent and 3.2 percent, respectively. Both industrial goods and services inflation slowed compared to the previous month. Persistent inflation developments were overall lower even than expected.
A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and weakening external activity is increasingly restraining the pace of inflation. Due to a strengthening of external disinflationary effects, core inflation excluding indirect tax effects is likely to decline gradually to 3 percent from the end of 2019. The increase of excise duty on tobacco products on a six-monthly basis, which is outside the scope of monetary policy, is likely to raise the consumer price index over the entire forecast horizon. This measure does not cause any second-round effects, consequently, does not influence changes in core inflation excluding indirect tax effects. Lower-than-expected underlying inflation data for recent months and the ongoing deterioration in external activity indicate strengthening in downside risks to the longer-term inflation outlook.
The Hungarian economy grew by 4.9 percent in the second quarter of 2019, mainly driven by market services, industry and construction. On the expenditure side, domestic demand might have continued to grow. Labour demand remained strong, and the unemployment rate was close to its historically low level. The current account remained in surplus in the first quarter of 2019. Due mainly to dynamic growth in imports, the trade surplus declined in recent quarters, primarily reflecting strong investment activity in the corporate sector.
Economic growth is expected to slow gradually from the middle of the year, but to remain strong. Subdued economic activity in Europe from the second half of the year is also reflected in the slowdown of growth in Hungary. The Hungarian economy is expected to grow by 4.3 percent in 2019 and by 3.3 percent in 2020. As a result of further dynamic growth in credit markets, the investment rate is likely to continue to rise and stabilise at high levels in the coming years. Regarding long-term, sustainable economic growth, the improvement in competitiveness by structural measures will be given increasing emphasis.
In addition to monetary policy, the new retail government security strategy, the 2020 Budget Act and the provisions of the Economy Protection Action Plan to improve competitiveness, are aimed at further strengthening macroeconomic stability and sustainable convergence. The Hungarian Government Security Plus, introduced in June, is expected to raise households’ savings rate, in addition to the structural change of their financial assets. Consequently, an increasing share of rapid wage growth is converted into savings instead of consumption, while the promotion of self-financing also helps to reduce Hungary’s external vulnerability.
Since its launch, more than HUF 1,650 billion of Hungarian Government Security Plus has been purchased. More than half of the purchases was registered as a new source of financing for the government sector. Based on the 2020 Budget Act, the budget deficit-to-GDP ratio is likely to decline to 1 percent, with the maintenance of a significant amount of reserves. After 2019, fiscal policy will remain counter-cyclical in 2020 as well. The announced Economy Protection Action Plan is expected to gradually improve the competitiveness of the domestic economy. The above measures jointly strengthen macroeconomic stability, reduce external vulnerability, and contribute to maintain a sustainable convergence path.
Due to the deteriorating outlook for global economic growth, monetary policy stances of the world’s leading central banks have become increasingly looser recently. Consistent with unfavourable European activity data and continued moderate inflation developments, the possibility of an interest rate cut appeared in the European Central Bank’s July forward guidance. In line with this, market participants expect an easing of monetary policy already in September. In July, the Federal Reserve reduced the policy rate for the first time since 2008. Meanwhile, market participants expect further loosening measures over the remainder of the year. In its forward guidance, the Bank of Japan signalled that, if necessary, it was ready to ease policy further.
Sentiment in international financial markets has deteriorated since the Council’s previous interest rate decision. Risk appetite was influenced by developments in international trade policies, measures taken by the world’s leading central banks and expectations of their future policy measures, domestic political tensions in Italy and news relating to Brexit. Oil prices have fallen recently.
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. By introducing the Bond Funding for Growth Scheme (BGS), the Council’s specific objective is to promote the diversification of funding to the domestic corporate sector. Corporate bond issuances are expected to pick up in the fourth quarter. 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 have concluded loan contracts with domestic SMEs totalling HUF 219 billion until end of July.
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 June, the Council set the average amount of liquidity, to be crowded out for the third quarter, at least at HUF 200-400 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. Accordingly, the stock of FX swaps providing forint liquidity has increased recently in order to achieve the average amount of liquidity to be crowded out.
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 remain favourable. A dichotomy remains between the factors determining likely developments in inflation. Buoyant domestic demand is boosting, and weakening external activity is increasingly restraining the pace of inflation. Regarding the persistent inflation trends, downside risks have strengthened. In assessing their extent data to be received in the second half of the year will be decisive. Of these, the following are of key importance: the spillover of disinflationary effects of slowing European economic activity, changes in monetary policies of the world’s leading central banks, the effect of the new retail government security on savings, and the economic consequences of counter-cyclical fiscal policy. The Monetary Council will assess their effects on the maintenance of price stability over the 5-8 quarter horizon of monetary policy. In its monetary policy decisions, the Council applies a cautious approach, relying mainly on the comprehensive projections for the macroeconomy and inflation of the quarterly published Inflation Report. The 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 11 September 2019.
MAGYAR NEMZETI BANK