14 December 2021
At its meeting on 14 December 2021, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 15 December 2021:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||2.10||+30||2.40|
|O/N deposit rate||Central bank base rate minus 0.00 percentage points||1.60||+80||2.40|
|O/N collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.10||+30||4.40|
|One-week collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.10||+30||4.40|
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, as well as its policy on environmental sustainability.
The global economic recovery has slowed in recent months, while the fourth wave of the coronavirus pandemic and the emergence of the new variant of the virus led to a renewed increase in risks surrounding the recovery. Inflation rose to levels not seen for several decades in a number of countries, which was further aggravated by disruptions in supply across a growing range of markets, in addition to persistent rises in commodity and energy prices.
Global investor sentiment has deteriorated since the Council’s previous policy decision. Risk appetite has been driven by rising inflation, the related monetary policy messages, and the spread of the Delta and Omicron variants of coronavirus. In commodity markets, a significant wave of price increases occurred in the autumn months. In the case of energy sources, the rise in prices was extraordinarily high; the prices of natural gas and electricity have multiplied since the beginning of the year. The global market price of crude oil fell, but it is significantly above its level a year earlier. Movements in the US dollar have been mixed against developed market currencies, while it tended to strengthen against emerging market currencies. At the same time, a withdrawal of capital began from emerging markets.
The policy stances of the world’s leading central banks have become tighter. In line with its November decision, the Federal Reserve started phasing out its asset purchase programme. Based on the Bank’s communication at the end of November, the phasing out of asset purchases might proceed at a faster pace than earlier announced, which is expected to be discussed at the December policy meeting. According to its communication, the European Central Bank will take a decision in December on the future use of the asset purchase programme. In the CEE region, the Polish central bank continued to raise its policy rate in December.
Hungarian economic growth has continued, but its dynamics has slowed. GDP grew by 6.1 percent in annual terms in the third quarter of 2021, thus exceeding its pre-crisis level by 0.7 percent. A wide range of sectors contributed to growth, but there were differences in dynamics across sectors. In October, industrial output continued to decline, reflecting subdued production due to the global shortage of semiconductors. Construction output continued to grow, supported by government investment activity and the strong housing market. The volume of retail sales continued to rise in October, slightly exceeding its pre-pandemic level. The unemployment rate remains steadily low even in international comparison.
The Hungarian economy has a strong ability to recover. Economic growth is expected to continue at a slower pace, while the structure of growth shows a dichotomy. Disruptions in international production chains, as well as rising commodity and energy prices, lead to a slowdown in the economic recovery, while the further strengthening in domestic demand cushions the effects of external factors. Household consumption growth continues, supported by the increase in the minimum wage next year and the government measures aimed at boosting household income. In addition to the increase in the minimum wage, the tight labour market also helps to maintain rapid wage growth. Higher commodity and energy prices, and weaker external demand are likely to hold back corporate investment activity in 2022. However, the investment rate is expected to stabilise at a high level even compared to the EU. As a result of the temporary slowdown in exports, reflecting the effects of external factors, and stronger domestic demand, net exports are likely to have a nearly neutral impact on GDP growth in 2022. In the second half of next year, exports are expected to rebound quickly as external markets and supply chains recover, which will also be supported by new export capacities. Hungarian GDP is expected to grow by 6.3–6.5 percent in 2021 and by 4.0–5.0 percent in 2022.
In November 2021, annual inflation was 7.4 percent, and core inflation stood at 5.3 percent. Headline inflation rose by 0.9 percentage points and core inflation by 0.6 percentage points on the previous month. The rise in inflation affected a wide range of goods and services. The global pick-up in commodity prices is appearing in consumer prices for a growing range of goods. Consumer prices are expected to rise by 5.1 percent in 2021 as a whole.
Inflation reached its peak in November, and it is expected to fall gradually from December. Short-term developments in inflation are determined by the fading impact of base and tax effects, the introduction of a cap on fuel prices and the extent of repricing at the beginning of the year. Core inflation will rise in the coming months and will be close to 6 percent by mid-2022, reflecting the rise in commodity and energy prices, increases in freight costs, and increasingly wider supply disruptions. Over the medium term, anchoring inflation expectations at a level consistent with the inflation target will play a crucial role in the achievement of price stability.
Core inflation excluding the effects of tax changes is expected to follow a downward path from the second half of next year as a result of the Bank’s proactive measures and as the effects of the pandemic and the external inflation environment fade gradually. Inflation is expected to return to the central bank tolerance band in the fourth quarter of 2022, before reaching the 3 percent central bank target in the first half of 2023. The consumer price index is projected to be 4.7–5.1 percent in 2022 and to be consistent with the inflation target from 2023.
The government deficit and the government debt-to-GDP ratio are expected to shift to a declining path from this year. The current account balance is likely to worsen due to the temporary effects of the pandemic, but to increase as external markets and supply chains recover, which will be supported by new export capacities built up in recent years. As a result, the current account balance is expected to show a deficit of three percent of GDP this year and next, and then to improve gradually toward the end of the forecast horizon. At the same time, the economy’s net lending is likely to increase following a temporary decline in 2021 and 2022, and will be around 1 percent of GDP at the end of the forecast horizon.
In order to avoid second-round inflationary effects and to properly anchor expectations, the Monetary Council continues the tightening of monetary conditions. According to today’s decision, the central bank base rate rises by 30 basis points to 2.40 percent. The overnight deposit rate was increased by 80 basis points to 2.40 percent which is equal to the base rate, while the overnight and the one-week collateralised lending rates were increased by 30 basis points to 4.40 percent.
The Monetary Council considers it a key priority to anchor inflation expectations properly and thereby continuously to mitigate second-round inflation risks. In the persistently changed inflation environment, the Monetary Council intends to drive expectations appropriately by continuing the cycle of base rate hikes at a monthly frequency and in a predictable manner. Rising yields as a result of the interest rate hikes and the expected gradual fall in inflation are expected to lead to an increase in real interest rates in the coming months.
The Bank continues to intend to respond to the increase in short-term risks in financial and commodity markets quickly, flexibly and to the extent necessary. The interest rate on the one-week central bank deposit has risen above the level of the base rate in recent weeks. The Monetary Council has increased the Bank’s room for manoeuvre by making the interest rate corridor asymmetrical. As long as financial and commodity market risks persist, the Bank will be ready to set the one-week deposit rate persistently above the base rate. The MNB will continue to set the one-week deposit rate at weekly tenders. In the Monetary Council’s assessment, raising the interest rate on the one-week central bank deposit at least by as much as the base rate is raised is warranted.
It remains 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. To this end, the MNB will actively use its swap facility providing foreign currency liquidity again, without a quantitative limit. In this context, the Bank will conduct a total of four tenders in December 2021. In addition, auctions of short-term discount bills will further contribute to the efficient sterilisation of financial system liquidity. The Monetary Council also supports the stability of swap market rates by raising the interest rate on the O/N central bank deposit to the same level as the base rate.
The Monetary Council attaches great importance to ensuring that all elements of the Bank’s monetary policy toolkit support the return to price stability as soon as possible. In line with this, at its December meeting the Monetary Council decided to close the Bond Funding for Growth Scheme. Following the realisation of negotiations with issuers currently underway up to the maximum amount allocated under the programme, the Bank will not purchase additional corporate bonds. Ample liquidity and strong capital position of the banking sector, as well as the improvement in bond market conditions in recent years and the effects of market development, make it possible to satisfy the corporate sector’s funding needs on a market basis.
The Monetary Council also took a decision on closing the government securities purchase programme. Accordingly, the Bank will stop purchasing bonds. In the Monetary Council’s view, the stable liquidity position of the government securities market is crucial for the effectiveness of monetary policy transmission looking ahead. The MNB will continue to closely monitor liquidity developments in the government securities market, and it will be ready to intervene in order to maintain the stability of the government securities market with occasional and targeted government securities purchases if necessary. Occasional government securities purchases will not indicate a change in the stance of monetary policy. The Bank will hold securities purchased until maturity.
In the Council’s assessment, the risks to inflation continue to be on the upside. Inflation expectations have risen in recent months. Persistently high commodity and energy prices, the increase in international freight costs and increasingly wider supply disruptions continue to point to more sustained external inflationary pressures. At the same time, the tight labour market, coupled with rising wage growth and a higher inflation environment, may lead to a further rise in inflation expectations and an increase in second-round inflation risks.
Mitigating second-round inflation risks and driving expectations appropriately have necessitated longer lasting, predictable monetary policy tightening. The Council still considers it necessary to continue the base rate tightening cycle on a monthly basis. Changes to the one-week central bank deposit rate will feed into the MNB’s tightening cycle for a sustained period. By raising the one-week deposit rate, the MNB continues to stand ready to respond to short-term risks in financial and commodity markets quickly and flexibly. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target in a sustainable manner and inflation risks become evenly balanced on the horizon of monetary policy.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 January 2022.
MAGYAR NEMZETI BANK