Press release on the Monetary Council meeting of 17 November 2020

17 November 2020

At its meeting on 17 November 2020, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 18 November 2020:

The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy.

Global macroeconomic and financial developments continue to be driven mainly by the events of the coronavirus pandemic and the news related to the development of the vaccine. Following a decline in the second quarter of 2020, the performance of large economies showed significant reversal in the third quarter, although it continued to fall short of the level seen a year earlier. Since mid-October, infection curves in several countries have risen sharply; therefore, governments decided to take restrictive measures. Due to the increasingly stronger restrictions introduced, the economic recovery is expected to be delayed. As a result, there remains an exceptionally high uncertainty surrounding the rate of global economic recovery.

Sentiment in global financial markets has been volatile recently. This primarily reflected developments in the current pandemic situation, the reintroduction of restrictive measures and their tightening and the events of the US presidential elections. The world’s leading central banks did not change their monetary conditions. According to market expectations, euro area inflation may remain in negative territory until the beginning of 2021, and the economic recovery seen in the summer months was halted in the autumn and restoration is expected to be delayed. The ECB may decide to introduce additional easing measures or to modify its instruments in the light of the December projection. In the CEE region, central banks held policy rates close to zero, and the Polish and Romanian central banks continued their government securities purchase programmes. Due to the protracted economic recovery, the world’s leading central banks and those in the region are expected to maintain loose monetary conditions over a prolonged period.

Based on data for the third quarter, economic activity underwent a significant correction after reaching a low point in April and May. According to the preliminary release by the HCSO, Hungary’s GDP rose by 11.3 percent relative to the previous quarter and it fell short of the level, seen a year earlier, by 4.6 percent. The recovery in the volume of retail sales following its low point in April was halted in September, while the rapid reversal of industrial production continued. The unemployment rate fell in the third quarter of 2020 relative to the previous quarter, and it remained at a low level of 4.4 percent in international comparison. So far, the corporate sector has responded to the challenges arising from COVID-19 primarily by raising the ratio of part-time workers, partly as a result of the Government’s measures. At the onset of the second wave of coronavirus, the economic recovery slowed and the additional significant restrictive measures, introduced to control the pandemic, may cause a delay in the restoration of economic growth.

As a result of the second wave of the pandemic, the economic recovery is expected to stall in the fourth quarter of 2020 before it continues from 2021. According to the MNB’s September projection, Hungary’s GDP is expected to decline by between 5.1 percent and 6.8 percent in 2020, which may be followed by growth between 4.4 percent and 6.8 percent in 2021. Economic performance may recover to its pre-crisis level by the turn of 2022.

In October 2020, annual inflation was 3.0 percent and core inflation excluding indirect tax effects stood at 3.2 percent. The value of both indicators declined relative to the previous month. Following the higher repricing in the summer months, from September, disinflationary effects strengthened. Consistent with this, the autumn months were characterised by gradually declining price dynamics primarily due to market services, food and fuel.

Developments in underlying inflation are still expected to be driven by the overall balance of the upside effects of supply-demand frictions and the growing disinflationary impact of weak demand. As a result of the coronavirus pandemic, pricing decisions continue to exhibit increased volatility and an unusual seasonal pattern in the coming quarters. The persistence of inflationary effects arising as a result of the economic recovery will also be important for the time profile of the decline in underlying inflation, which the Monetary Council will closely monitor.

According to the October EDP report, the government deficit will amount to around 8 percent of GDP in 2020. The debt-to-GDP ratio is likely to rise temporarily in 2020 but is expected to move onto a downward path from 2021 once economic growth is restored and the deficit decreases. The current account balance is expected to show a slight deficit in 2020 and then to improve gradually. With Hungary’s net lending position remaining persistently stable, the country’s external debt ratios will continue to decrease in the coming years.

In the Monetary Council’s assessment, consistent with the risk scenario highlighted in the September Inflation Report, the increase in risk aversion vis-a-vis emerging markets continues to pose the greatest risk in terms of the outlook for inflation. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside risks to inflation.

It is a key priority for the MNB that short-term rates in every sub-market and at all times should develop consistently with the level of short-term rates deemed optimal by the Monetary Council. In order to ensure this, the Bank reintroduced its swap facility providing foreign currency liquidity in September. Due to the Bank’s active presence, there was no tension in the swap market at the end of the third quarter. Measures taken at the short end of the yield curve contribute to preserving the stability of monetary conditions and through this to maintaining price stability.

In response to the adverse economic effects arising from the coronavirus pandemic, the MNB expanded significantly the central bank balance sheet and thereby supporting the recovery of economic growth as well. The central bank balance sheet has contracted in recent years creating sufficient potential to address economic challenges in a sustainable manner. The MNB’s balance sheet can still be considered of average size in regional comparison, despite a significant expansion this year. The MNB will be ready to expand its balance sheet further to manage risks arising from the coronavirus pandemic and to foster the quick recovery of sustainable economic growth.

At its meeting today, the Monetary Council performed the technical revision of its government securities purchase programme. In the Monetary Council assessment, the programme has been successful. The stock of government securities in the Bank’s balance sheet has increased by over HUF 700 billion since May 2020. Government securities purchases by the Bank contributed to maintaining a stable liquidity position in the government securities market and strengthened the effectiveness of monetary policy transmission. The MNB continues to use the government securities purchase programme and to settle for a lasting market presence in the government securities market. The MNB will use the programme to the extent and to the time necessary. The Bank applies a flexible approach to the amount of its weekly purchases, concentrating its purchases on longer maturities. The Council has proceeded without setting a total amount to the government securities programme. The Monetary Council will perform the next technical revision when the stock of purchases reaches HUF 2,000 billion while continuously monitoring the implementation of its asset purchase programme.

The utilisation of the Funding for Growth Scheme Go! exceeded HUF 1,000 billion by mid-November; therefore, at its meeting today, the Monetary Council decided to raise the total amount of programme by HUF 1,000 billion as well. The FGS Go! plays a key role in mitigating the adverse economic effects of coronavirus as it offers cheap funding with reliable rates to the SME sector with the most favourable conditions ever and a wide range of applications. There has been significant interest by companies in the FGS Go! since it was launched in April. Under the scheme, 15,000 companies have accessed favourable funding until mid-November. During the economic recovery, it is of key importance for the Monetary Council to provide the amount of funding required for the continuous operations of SMEs and the realisation of their investment projects, which also fosters the recovery of economic growth.

By the end of October 2020, over 260 companies registered for the Bond Funding for Growth Scheme. By the end of the period, 35 companies successfully issued 40 bond series, raising more than HUF 680 billion. The MNB will continue to sterilise the resulting surplus liquidity issued under the programmes in full, using the preferential deposit instrument.

At its meeting today, the Monetary Council left the base rate and the overnight deposit rate unchanged at 0.60 percent and -0.05 percent, respectively, and the overnight and the one-week collateralised lending rates at 1.85 percent. The MNB will continue to set the one-week deposit rate at weekly tenders, in response to the increase in risk aversion vis-a-vis emerging markets. The Bank will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks.

In the Monetary Council’s assessment, the monetary conditions established at the short end support price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner. In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero. The MNB remains committed to maintaining price stability during the coronavirus pandemic. Consequently, the Council continuously assesses incoming data, closely monitors the persistence of inflationary effects resulting from the restoration of the economy and the possible inflationary effects of financial market developments. If warranted by a change in the outlook for inflation, the MNB will be ready to use the appropriate instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 2 December 2020.

MAGYAR NEMZETI BANK

Monetary Council