25 August 2020
At its meeting on 25 August 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 26 August 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|
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.
The coronavirus pandemic hit the global economy in a weakened state. In most of the developed countries, real economic performance declined substantially in the second quarter. Economic activity entered a new phase of gradual recovery from June; however, several countries’ infection curve started to rise again. The second wave of the pandemic will cause an increase in risks. 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.
In the past month, sentiment in global financial markets has been volatile: the dollar exchange rate has depreciated, while long-term yields in developed countries have mostly risen. The Federal Reserve and the European Central Bank have continued their liquidity-providing and asset purchase programmes in the recent period. In our region, the Romanian central bank reduced policy rates, while decision-makers at the Czech and the Polish central banks left them at 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. Hungary’s health defence against the first wave of the coronavirus has been successful. As a result of the economic shutdown, production in most sectors of the national economy declined. Consequently, Hungarian GDP fell by 13.6 percent year-on-year in the second quarter of 2020. Due to the weaker-than-expected GDP data, a revision of the economic outlook for this year has become necessary, which will be made in the projection of the September Inflation Report. Successful health defence continues to provide an appropriate foundation for the economic recovery.
This year’s macroeconomic data are expected to show significant volatility and dichotomy. The effects of the pandemic were the strongest in data for the second quarter. The recovery started in May following the trough in April. The significant improvement in economic activity was reflected mostly in the June data. A pick-up in public investment and an expansion in corporate lending are required for a ‘V' shape economic recovery in the second half of the year. 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.
In July 2020, inflation stood at 3.8 percent and core inflation excluding indirect tax effects was 4.1 percent. Incoming data exceeded expectations. In the period when the economy was restarted, a faster rise in prices was mainly caused by changes in the structure of aggregate supply and demand. In specific sub-markets demand was soaring, while the recovery of disrupted supply caused by the pandemic situation was slow in others. The effects of the changes in indirect taxes contributed to the rise in inflation by a further 0.4 percentage points. Changes in fuel and food prices increased the volatility of inflation while statistical factors constitute unusually stronger measurement uncertainty.
The consumer price index is expected to remain around its current level in the coming months, before inflation stabilises at close to the central bank target of 3 percent as economic activity is brought back to normal. Disinflationary effects of the coronavirus pandemic become even stronger over the forecast horizon. Deteriorating economic activity due to the pandemic is likely to reduce 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. The Monetary Council monitors closely the persistent inflationary effects as the economy recovers.
As a result of the rising cost of protective economic measures and the reduction of the tax base, the budget deficit in the first half of the year stood at 5.9 percent of GDP in the first half. The government debt ratio has risen to 71.9 percent of GDP due to a decline in GDP and a higher financing requirement. After the significant rise in government debt, in parallel with the recovery of the economy, the ratio 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.
In a more favourable sentiment in financial markets the forint appreciated against the euro for most of the period, together with other currencies in the region. After the previous interest rate decision in July, long-term yields and yield spreads declined; however, in recent weeks the effect of the rise in global yields also appeared in domestic yield developments.
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 access for the domestic corporate sector to sustainable, stable and long-term funding and help the 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.
By launching its government securities purchases programme in April 2020, the MNB successfully managed to stabilise developments in the government securities market and to reduce yields. After a temporary break, the MNB made targeted government securities purchases again in the segment of over 15-year maturities from July 2020 to ensure that the base rate cut has its effects on the longer segment of the yield curve as well.
The Monetary Council intends to use the government securities purchase programme to the extent and for the time necessary. The global deterioration in recent weeks in the pandemic situation raises external risks, while expenditures related to economic defence result in a higher government financing requirement. To maintain the effectiveness of monetary transmission and the stable liquidity position of the government securities market, the Monetary Council deems it necessary to increase the amount of weekly government securities purchases, in addition to keeping the long-term collateralised lending facility. The Bank will continue to make purchases in the long segment to support an extension in the maturity structure of government debt.
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.
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 9 September 2020.
MAGYAR NEMZETI BANK