21 July 2020
At its meeting on 21 July 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 22 July 2020:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||0.75||-15||0.60|
|O/N deposit rate||Central bank base rate minus 0.65 percentage points||-0.05||No change||-0.05|
|O/N collateralised lending rate||Central bank base rate plus 1.25 percentage points||1.85||No change||1.85|
|One-week collateralised lending rate||Central bank base rate plus 1.25 percentage points||1.85||No change||1.85|
In the current extraordinary economic environment, the Magyar Nemzeti Bank’s (MNB) mandate is still to achieve and maintain price stability, to preserve financial stability, as well as to support the Government’s economic policy. Macroeconomic and financial developments continue to be mostly driven by the effects of the coronavirus pandemic. Based on the projection in the June Inflation Report, Hungarian economic performance in 2020 is likely to be more subdued than earlier expected, while the outlook for inflation has shifted downwards persistently.
The coronavirus pandemic hit the global economy in a weakened state. As a result of the measures taken to prevent the spread of the pandemic, in the second quarter real economic activity declined, while unemployment rates rose worldwide. From the beginning of May economic activity has restarted gradually as the restrictive measures were eased; however, the number of new cases has grown at an increasing pace in several countries in the past month. There remains an exceptionally large degree of uncertainty in judging the time profile of the health emergency and the speed of the global economic recovery.
The outlook for growth in the global economy has deteriorated significantly. Disinflationary effects have strengthened. Sentiment in global financial markets has been volatile in the past month. The Federal Reserve and the European Central Bank have continued their liquidity-providing and asset purchase programmes in the recent period. In our region, decision-makers at the Czech and the Polish central banks left policy rates close to zero.
The coronavirus pandemic hit the Hungarian economy when its fundamentals were stable and growth was strong. The economic policy pursued over the past decade has maintained the country’s macroeconomic balance and reduced its external and internal vulnerability. In the first quarter of 2020, Hungarian GDP growth slowed to 2.2 percent year on year. However, the Hungarian economy’s growth surplus compared to the euro area far exceeded the value of around 3 percentage points achieved in recent years. Hungary’s defence against the first wave of the coronavirus has been successful, which provides appropriate foundation for the economic recovery.
This year’s macroeconomic data are expected to show significant volatility and dichotomy. The effects of the pandemic are likely to be the strongest in data for the second quarter. The recovery, started in May following the trough in April, is expected to continue in June. After a significant decline in GDP in the second quarter, a recovery of economic growth is expected from the third quarter. A pick-up in public investment and an expansion in corporate lending are required for a quick ‘V' shape economic recovery in the second half of the year. The moratorium on instalment payments of loans contributes HUF 2,000 billion to maintaining purchasing power and preserving jobs by the end of the year overall. In line with the expected slower recovery in the external environment, production in export-oriented industrial sectors may pick up only towards the end of the year. Overall, Hungarian GDP may grow at a restrained pace in 2020. Economic growth is expected to be 0.3–2.0 percent in 2020, 3.8–5.1 percent in 2021 and 3.5–3.7 percent in 2022.
As a result of the cost of protective economic measures and the slower nominal GDP growth, the budget deficit in 2020 is likely to rise compared to previous years but to remain low in international comparison. The government debt ratio is expected to rise temporarily; then, with the quick recovery of the economy, it is expected to return to a downward path from 2021. The current account balance is expected to show a moderate deficit this year as well, but net lending remains persistently positive. Hungary’s external debt-to-GDP ratios are expected to decline further.
Due to the coronavirus epidemic, strong disinflationary effects have appeared in the Hungarian economy as well. Following a temporary rise at the beginning of 2020, the consumer price index quickly returned into the central bank tolerance band, before declining to its lower bound in May. In June 2020, inflation rose to 2.9 percent, and core inflation excluding indirect tax effects remained unchanged on the previous month. Higher consumer price inflation primarily reflected a rise in the price index for fuel, partly due to base effects. Incoming inflation data were in line with the MNB’s expectations.
The coronavirus pandemic has led to significant fluctuations in food and oil prices in global commodity markets, thus high volatility in domestic inflation is expected to persist. Due to these volatile items, inflation is expected to rise temporarily in the coming months, before stabilising again around the 3 percent central bank target as these effects fade. Weakening economic activity caused by the coronavirus pandemic reduces core inflation excluding indirect tax effects through several channels. In addition to a weaker external inflation environment, more muted domestic demand compared to previous years is also increasingly restraining underlying inflation. Due to strong disinflationary effects, core inflation excluding indirect tax effects will fall below 3 percent: it is expected to stand at 3.3–3.5 percent in 2020 and at 2.6–2.7 percent in 2021.
Domestic financial market conditions have shown a mixed picture since the Council’s previous interest rate decision. As in the case of emerging market currencies, the forint depreciated against the euro during the period. In the government securities market, yields at maturities up to 5 years fell and those at longer maturities, in particular over 10 years, rose.
Decisions of the Monetary Council in spring months helped to stabilise domestic money market developments while liquidity with favourable conditions, available to all economic agents, supports the recovery of economic growth. The Bond Funding for Growth Scheme (BGS) and the Funding for Growth Scheme Go! (FGS Go!) ensure the domestic corporate sector to access sustainable, stable and long-term funding, and credit market and investment growth to pick up. The MNB extended the range of potential uses of funds granted under the FGS Go! in early July to allow SMEs to have wider access to funds with favourable conditions under the Scheme and thereby to stimulate the economy.
At its current policy meeting, to maintain price stability and to support the restoration of economic growth, the Monetary Council reduced the base rate by 15 basis points to 0.60 percent. The Monetary Council left the overnight deposit rate at -0.05 percent and the overnight and the one-week collateralised lending rates at 1.85 percent unchanged. The MNB will continue to set the one-week deposit rate at the weekly tenders.
The effects of the interest rate cut in June appeared persistently in the shorter segment of the yield curve. However, it is of key importance from a monetary policy perspective that the effect of the base rate reduction should have its effect on the longer segment of the yield curve as well. Therefore, to improve monetary policy transmission, the Monetary Council decided to reallocate between its instruments affecting longer-term maturities, i.e. its long-term collateralised lending instruments and government securities purchases. Consequently, the Bank will purchase limited amounts of government securities in the segment of over 15-year maturities. In addition to improving the transmission of monetary policy, this measure is intended to support an extension in the maturity structure of government debt. The Council continues to consider the government securities purchase programme as a safety net, which it intends to use if and to the extent necessary.
In the Monetary Council’s assessment, the 0.60 percent base rate supports 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 Council continuously assesses incoming data and changes in the outlook for inflation. In the event of a persistent deterioration in the outlook for growth, the Bank will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme, providing the most direct support to investment.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 August 2020.
MAGYAR NEMZETI BANK