21 September 2021
At its meeting on 21 September 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 22 September 2021:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||1.50||+15||1.65|
|O/N deposit rate||Central bank base rate minus 0.95 percentage points||0.55||+15||0.70|
|O/N collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.45||+15||2.60|
|One-week collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.45||+15||2.60|
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 the summer 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 led to a renewed increase in risks surrounding the economic recovery. Consequently, international confidence indicators in manufacturing and services deteriorated in August.
International risk appetite was driven by the spread of the Delta variant of coronavirus, monetary policy messages of the world’s leading central banks, and incoming macroeconomic data. Prices of several important commodities have risen in the past month, and as a result they remain significantly above pre-pandemic levels. Global oil prices rose overall in the period.
The world’s leading central banks maintained loose monetary conditions and continued their asset purchase programmes in the past month. The Federal Reserve maintained its monetary policy stance; however, based on communication by some decision-makers the possibility of modifying its crisis management programmes is approaching. Following its decision in September, the ECB announced that purchases under the Pandemic Emergency Purchase Programme (PEPP) would be made at a slower pace than in the previous two quarters. Several developed country central banks started to phase out their asset purchase programmes in the past months. In the region, central bank decision-makers generally indicated that they would stand ready to tighten monetary conditions, when necessary, due to an increase in the outlook for inflation.
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. In July, construction and industrial production already exceeded pre-pandemic levels. 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 July but fell still short of levels seen before the pandemic. Demand for market services increased significantly, which was also reflected in a strong expansion in household consumption. The unemployment rate fell further in July, and its level remained low in international comparison.
Hungary’s GDP will rise 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 continue to rise before stabilising around 29 percent in the second half of the forecast horizon. Hungarian export performance rebounded strongly in 2021, and with the utilization of new export capacities built in previous years, it is expected to grow strongly over the entire forecast horizon. With the end of the year approaching, the fourth wave of the coronavirus pandemic is increasing risks to the economic outlook.
In August 2021, annual inflation was 4.9 percent, and core inflation stood at 3.6 percent. Headline inflation rose by 0.3 percentage points and core inflation by 0.1 percentage point compared with the previous month. The rise in inflation was driven mainly by an increase in the inflation of fuel, industrial goods and unprocessed food. The effect of a global pick-up in commodity prices is causing inflation to accelerate in an increasingly wide range of industrial goods. In the summer, the significant monthly rise in market services stopped, suggesting that the vast majority of repricings related to the reopening may have already materialised.
Inflation is expected to rise further in the autumn months and to stay above 5 percent during the remainder of the year. The gradual pass-through of increased commodity prices and freight costs into industrial goods prices is expected to be decisive in case of underlying inflation. Core inflation is expected to rise to close to 4 percent during the remainder of the year. The effects of the Bank’s tightening cycle will be clearly felt in 2022. According to the Inflation Report projection, inflation will start to fall from the beginning of 2022 before returning to the central bank tolerance band in the second quarter. The consumer price index is expected to stabilise around the 3 percent central bank target in the second half of 2022.
Some of the inflation risks, indicated in June, materialised in the summer months; however, risks to the outlook remain on the upside. The increase in commodity prices and freight costs continued; therefore, these factors continue to point to a higher external inflationary environment. Demand-supply frictions emerging temporarily, and the renewed tightening of labour market capacities in certain sectors, combined with dynamic wage growth carry upside risks to inflation. A more serious fourth wave of the coronavirus pandemic than expected in the baseline projection and a stronger slowdown in the global economy indicate a lower inflation path.
The government deficit, even with the September issuance of foreign currency denominated bonds, is expected to decline from 2021 and the debt-to-GDP to shift to a declining path. 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 continues to fall.
At its meeting today the Monetary Council decided to continue to tighten monetary conditions by applying several instruments. In the Monetary Council’s assessment, the inflation outlook and the risks surrounding it clearly warrant the continuation of the ongoing, monthly interest rate tightening cycle. In addition to the tightening of interest rate conditions, the Monetary Council reduced further the target amount of weekly government securities purchases. Furthermore, the Council considered it necessary to gradually phase out the foreign-exchange swap facility providing forint liquidity and to tighten the liquidity provided by the instrument.
According to the September decision, the central bank base rate rises by 15 basis points to 1.65 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 0.70 percent, while the overnight and the one-week collateralised lending rates increase to 2.60 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.
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. The MNB continues to actively use its swap facility providing euro liquidity at the end of the quarters. Accordingly, the Bank will hold a total of five tenders until the end of September. To the same end, the MNB gradually phases out its FX swap facility providing forint liquidity taking into account the developments in the swap market.
The Monetary Council continues to gradually withdraw the government securities purchase programme while considering aspects of maintaining market stability. Accordingly, the target amount of the MNB’s weekly purchases will decrease from HUF 50 billion to HUF 40 billion from the week starting on 27 September 2021. The Bank may depart from this arrangement in a flexible manner, depending on supply and other market conditions. Next time the Monetary Council will set the target amount of weekly purchases for the following quarter in December.
In the Council’s assessment, a stable liquidity position in the government securities market remains crucial from the perspective of monetary policy transmission. 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 is committed to maintaining price stability. In the decision-makers’ assessment, the inflation outlook is surrounded by upside risks. According to the Inflation Report projection, inflation will follow a declining path from the beginning of 2022, while the fourth wave of the coronavirus pandemic points to an increase in the risks to economic recovery. These warrant a continuation of the monthly interest rate tightening cycle with lower pace. 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 6 October 2021.
MAGYAR NEMZETI BANK