19 October 2021
At its meeting on 19 October 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 20 October 2021:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||1.65||+15||1.80|
|O/N deposit rate||Central bank base rate minus 0.95 percentage points||0.70||+15||0.85|
|O/N collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.60||+15||2.75|
|One-week collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.60||+15||2.75|
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.
Global economic recovery continued in recent months, and in parallel, inflation rose. Where the reopening took place earlier an increase in consumer prices occurred faster as well. The fourth wave of the coronavirus pandemic has led to a renewed increase in risks surrounding the economic recovery. International confidence indicators in manufacturing and services weakened in September.
Global investor sentiment has deteriorated since the Council’s previous policy decision. Among already existing risks, the spread of the Delta variant of coronavirus, the shortage of microchips, and monetary policy messages of the world’s leading central banks have contributed to this. In addition, as new factors, the energy crisis and the emergence of risks related to the Chinese real estate market have also contributed to a worsening in investor sentiment. In commodity markets, another significant wave of price increases occurred in September. In the case of energy sources, the rise in prices was extraordinarily high. The price of natural gas has more than tripled since the beginning of the summer, while the price of electricity has more than doubled. World market price of crude oil rose to over USD 80. Overall, the US dollar appreciated against the euro and most emerging market currencies.
The world’s leading central banks have maintained loose monetary conditions in the past month, but there has been a shift in their communications towards a tighter tone. At its September policy meeting, the decision-makers of the Federal Reserve signalled that a moderation in the pace of asset purchases might soon be warranted if the economy develops in line with expectations. The European Central Bank slowed the pace of purchases under the Pandemic Emergency Purchase Programme (PEPP) in September. In the CEE region, the Romanian and Polish central banks started to raise policy rates due to an increase in the inflation outlook, and the Czech central bank raised its policy rate more than expected by market participants.
The Hungarian economy restarted successfully. GDP reached its pre-pandemic level in the second quarter. Hungary is among the economies in Europe showing the fastest recovery. Based on monthly data, strong economic recovery continued in the third quarter. A wide range of sectors contributed to growth, but there were differences in the pace of recovery. The year-on-year rate of industrial and construction output growth slowed in August compared to the previous month. The recovery in the domestic automobile industry has been held back by a global shortage in microchips; however, robust growth in battery manufacturing is becoming increasingly dominant in industrial production. The volume of retail sales continued to rise in August, approaching pre-pandemic levels. The unemployment rate continues to be low in international comparison.
Hungary’s GDP is expected to grow by between 6.5 and 7 percent in 2021 and by between 5 and 6 percent in 2022. In the favourable labour market environment, growth in household consumption is expected to continue, while a general pick-up in investment is likely to make a positive contribution to GDP growth from 2021 again. The investment rate will rise to a historically high level in the second half of the forecast horizon. Hungarian export performance has rebounded strongly in 2021, and with the utilisation of new export capacities built in previous years, it is expected to grow markedly over the entire forecast horizon. The fourth wave of the coronavirus pandemic and the energy crisis are increasing the risks to the economic outlook.
In September 2021, annual inflation was 5.5 percent, and core inflation stood at 4.0 percent. Headline inflation rose by 0.6 percentage points and core inflation by 0.4 percentage points compared to the previous month. The rise in inflation was driven by price increases affecting a wide range products and services. The global pick-up in commodity prices is gradually appearing in consumer prices of a growing range of products.
Inflation is expected to rise further in the autumn months. The significant rise in commodity prices in recent weeks points to a higher inflation path in the short run than expected in September. The pass-through of increased commodity prices and freight costs into industrial goods prices is expected to be crucial in the case of underlying inflation. Core inflation is expected to be around 4 percent throughout the remainder of the year. The effects of the Bank’s tightening cycle will be clearly felt in 2022. According to the September Inflation Report’s projection, inflation is expected to start to fall from the beginning of 2022 and to return to the central bank tolerance band in the second quarter, before stabilising around the 3 percent central bank target in the second half of 2022.
The risks to the outlook for inflation remain on the upside. Rises in commodity and energy prices as well as international freight costs continue to point to a higher external inflationary environment which is more persistent than previously expected. Demand-supply frictions emerging temporarily, and the renewed tightening of labour market capacities in certain sectors, combined with dynamic wage growth, also carry upside risks to inflation.
The government deficit is expected to fall from this year and the debt-to-GDP ratio to shift to a declining path even taking into account the September issuance of foreign currency denominated bonds. The current account balance is expected to improve over the forecast horizon, with a growing contribution from net exports due to new export capacities built up. The economy’s net lending is likely to increase further and to stabilise around 3 percent of the GDP, and therefore Hungary’s net external debt will continue to fall.
At its meeting today, the Monetary Council decided to continue to tighten monetary conditions. In the decision-makers’ assessment, the outlook for inflation and the risks surrounding it, which remained on the upside, clearly warrant the continuation of the monthly interest rate tightening cycle started in June.
According to the October decision, the central bank base rate rises by 15 basis points to 1.80 percent. The Monetary Council also considers a 15-basis point increase in the interest rate corridor to be justified: the overnight deposit rate increases to 0.85 percent, while the overnight and the one-week collateralised lending rates increase to 2.75 percent. The MNB will continue to set the one-week deposit rate at weekly tenders. According to the Monetary Council’s assessment, it is warranted to increase the interest rate on the one-week deposit instrument by the same measure as in the base rate.
Maintaining an active presence in the market, the MNB has managed to cushion the spillover effects of tensions in international swap markets, thereby contributing to preserving the stability of monetary conditions. 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 continues to phase out its FX swap facility providing forint liquidity in a dynamic way, taking into account developments in the swap market. In addition, the Bank will prepare further steps to preserve the stability of the swap market and the effectiveness of monetary policy transmission in the coming months.
In the Council’s assessment, a stable liquidity position in the government securities market remains crucial from the perspective of monetary policy transmission. In its September decision, the Council set the target amount of the MNB’s weekly purchases at HUF 40 billion. The MNB continues to use the government securities purchase programme taking a flexible approach to changing the quantity and structure of weekly purchases, to the extent and for the time necessary. If warranted by the maintenance of market stability, the MNB will stand ready to temporarily raise the volume of weekly purchases at any given time. The Bank will not sell the stock of government securities on its balance sheet, purchased government securities will be held to maturity. The Monetary Council will set the next target amount of weekly purchases for the following quarter in December.
The Monetary Council is committed to achieving and maintaining price stability. In the decision-makers’ assessment, the inflation outlook continues to be surrounded by upside risks which might prove to be more persistent than earlier expected. For this reason, the Council considers it necessary to continue the monthly interest rate tightening cycle. 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 3 November 2021.
MAGYAR NEMZETI BANK