22 September 2020
At its meeting on 22 September 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 23 September 2020:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||0.60||No change||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|
The primary objective of 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.
Macroeconomic and financial developments continue to be driven mainly by the effects of the coronavirus pandemic. Global GDP fell sharply in the second quarter of 2020. With the gradual withdrawal of restrictive measures, world economic activity picked up from June; however, infection curves started to rise again in most countries from the end of the summer. In September, the number of daily infections rose to record levels globally, which made it necessary to reintroduce restrictions. There continues to be an exceptionally large degree of uncertainty surrounding the time profile of the coronavirus pandemic and the speed of the global economic recovery.
In the past month, sentiment in global financial markets has been mixed: the US dollar depreciated overall, while long-term yields fell across developed countries. Both the Federal Reserve and the European Central Bank continued their liquidity-providing and asset purchase programmes. In August, the Fed announced that it would seek to achieve inflation that averaged 2 percent over time and would adopt an asymmetric response to swings in the labour market. Accordingly, in September decision makers expect the policy rate to remain at its current low level over the next three years. 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. The world’s leading central banks and those in the region are expected to maintain loose monetary conditions over a prolonged period.
The coronavirus pandemic hit the Hungarian economy when its fundamentals were stable and growth was strong. Hungary’s health defence against the first wave of coronavirus was successful. The severe epidemiological restrictions had their economic effects predominantly in the second quarter. After growing by 2.2 percent in the first quarter, Hungarian economic performance declined by 13.6 percent in the second quarter on a year earlier. Overall, in the first half of 2020 the Hungarian economy exhibited a similar decline to that seen in other countries of the region. The decline in economic performance and the postponement of investments appeared in a wide range of sectors. Companies adjusted to the changing circumstances mainly by reducing working hours and increasing the number of part-time workers, while preserving a large proportion of jobs.
As in most other countries in Europe, the number of infections started to increase again in Hungary towards the end of the summer. Due to the second wave of coronavirus, the economic recovery takes longer than earlier expected. Overall, Hungary’s GDP is expected to decline by between 5.1 and 6.8 percent in 2020, which may be followed by growth between 4.4 and 6.8 percent in 2021. Economic performance may recover to its pre-crisis level by the turn of 2022.
Demand in specific sub-markets soared, while disrupted supply in others only recovered slowly due to the pandemic situation, which caused an increase in inflation during the summer months. Inflation and core inflation excluding the effects of indirect taxes rose to 3.9 and 4.2 percent, respectively, in August 2020.
Inflation is expected to stay close to current levels in September, before decreasing gradually towards the end of the year due to the fall in fuel prices and base effect. In the coming quarters, developments in underlying inflation are likely to be driven by the overall balance of supply-demand frictions related to the restart of the economy and the growing disinflationary impact of weak demand. The persistence of inflationary effects arising as a result of the economic recovery will also have an effect on the time profile of the decline in underlying inflation, which the Monetary Council will closely monitor.
The government deficit may amount to 7-7.5 percent of GDP in 2020. The debt-to-GDP ratio is likely to rise 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 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.
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 the weekly tenders.
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. The MNB may use its international master repurchase agreements providing euro liquidity to finance the swap instrument. At the first tender held on 18 September 2020, the MNB accepted the full amount of EUR 575 million offered by banks. The tender ensured that developments in short-term swap market yields were in line with the MNB’s base rate.
In August, the MNB increased the amount of weekly government securities purchases to HUF 40 billion to maintain the effectiveness of monetary transmission and the stable liquidity position of the government securities market. The Monetary Council will use the government securities purchase programme through a lasting market presence to the extent required. The Bank will continue to purchase government securities in the long segment.
In view of the large-scale utilisation, the Monetary Council raised the amount available under the Bond Funding for Growth Scheme to HUF 750 billion from 23 September. The increased amount may help the Hungarian corporate bond market continue to converge to European and regional averages. 10,000 loan or leasing contracts have already been concluded with 8,000 domestic companies under the FGS Go! scheme for a total amount of nearly HUF 600 billion. The MNB will continue to sterilise the resulting surplus liquidity issued under the programmes in full, using the preferential deposit instrument.
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 remains committed to maintaining price stability during the coronavirus pandemic and pays particular attention to the persistence of inflationary effects arising as a result of the economic recovery. If warranted by a persistent change in the outlook for inflation, the Council will be ready to use the appropriate instruments.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 7 October 2020.
MAGYAR NEMZETI BANK