24 August 2021
At its meeting on 24 August 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 25 August 2021:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||1.20||+30||1.50|
|O/N deposit rate||Central bank base rate minus 0.95 percentage points||0.25||+30||0.55|
|O/N collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.15||+30||2.45|
|One-week collateralised lending rate||Central bank base rate plus 0.95 percentage points||2.15||+30||2.45|
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. In parallel, global inflation also increased. In countries where the economy reopened sooner, inflation picked up earlier. International confidence indicators in manufacturing and services continued to suggest a positive outlook in July. However, the fourth wave of the coronavirus pandemic causes a renewed increase in the risks surrounding the recovery.
International risk appetite was driven by the spread of the Delta variant of the coronavirus, monetary policy messages of the world’s leading central banks and macroeconomic data. Following a previous sustained rise, the prices of several important commodities have declined over the past month. Global oil prices fell overall in the period.
The Federal Reserve and the European Central Bank maintained loose monetary conditions and continued their asset purchase programmes. Nevertheless, based on the communication by the Federal Reserve’s decision-makers, the possibility of phasing out the crisis management programmes arises more often. Meanwhile, central banks in some developed countries have already slowed the pace of their asset purchases. In the region, a number of central banks have recently indicated that they would stand ready to tighten monetary conditions, when necessary, due to the increase in the outlook for inflation. In August, the Czech central bank raised the base rate by an additional 25 basis points, while the central bank of Romania left the policy rate unchanged.
The Hungarian economy has successfully restarted. In the second quarter of 2021, domestic GDP grew by 17.9 percent year-on-year, while it rose by 2.7 percent relative to the previous quarter, exceeding the level seen before the crisis. The pace of the economic recovery in Hungary is substantially better than the EU average.
A wide range of sectors have contributed to the growth, but there are differences in the pace of recovery. In June, construction output approached, while industrial production already exceeded pre-crisis levels. Retail sales continue to fall short of their value preceding the pandemic. Real earnings, affecting mostly household consumption, rose further in May. Unemployment rate remained broadly unchanged in June and can still be considered low in international comparison.
The historically high investment rate will continue to rise on the forecast horizon. Hungarian export performance is expected to improve markedly already in 2021 as external markets recover. The increase in the production of new export capacities built in previous years causes a dynamic expansion of exports over the entire forecast horizon. Household demand is likely to pick up gradually. Economic recovery in Hungary is one of the fastest compared with other European countries.
In July 2021, annual inflation was 4.6 percent, while core inflation stood at 3.5 percent. The consumer price index declined by 0.7 percentage points relative to the previous month. The decline in inflation is mainly attributable to base effects. The price index of market services stopped rising in July, suggesting that the vast majority of repricings related to the reopening has already materialised.
The consumer price index will temporarily rise again in autumn due to base effects. Therefore, the pace of the increase in prices is expected to remain above the central bank tolerance band until the end of the year. Thereafter, inflation is expected to fall back into the central bank tolerance band at the beginning of 2022 and to stabilise around the central bank target from mid-2022 as a result of the monetary policy tightening cycle.
Increased commodity prices and a sustained rise in international freight costs point to a higher external inflation environment. Demand-supply frictions, emerging temporarily due to the rapid restart of the domestic economy, and the renewed tightening of labour market capacities expected in certain sectors, combined with dynamic wage growth, carry upside risks to inflation.
Following 8.1 percent in 2020, from 2021 the government deficit is expected to decline and, in parallel, the debt-to-GDP ratio to shift to a downward path. The current account surplus and the economy’s net lending are expected to continue rising over the forecast horizon. The decline in Hungary’s net external debt will continue.
In order to ensure price stability, prevent second-round inflationary effects and anchor inflation expectations, the Monetary Council tightened monetary conditions further in its decision today, continuing the interest rate hiking cycle started in June. According to the August decision, the central bank base rate rises by 30 basis points to 1.50 percent. The Monetary Council also considers a 30 basis point increase in the interest rate corridor to be justified: the overnight deposit rate increases to 0.55 percent, while the overnight and the one-week collateralised lending rates increase to 2.45 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.
In parallel with the tightening of interest rate conditions, the Monetary Council continues to gradually phase out its crisis management instruments affecting longer maturities. Accordingly, with the exhaustion of the available amount, the MNB announced the termination of the FGS Go! in June 2021 and discontinued the use of the long-term collateralised lending facility from its July decision. In August, the Monetary Council performed another revision of its government securities purchase programme. During the pandemic, the government securities purchase programme successfully contributed to maintaining a stable liquidity position in the government securities market and strengthened the effectiveness of monetary policy transmission in a volatile international financial environment.
At its meeting today, the Monetary Council decided to begin gradually withdrawing the government securities purchase programme while considering aspects of maintaining market stability. In the future, the Monetary Council will not set a revision limit applicable to the entire stock purchased under the programme. Instead, the Council will set a target amount for weekly purchases.
As a first step, the MNB’s purchases will decrease from a weekly amount of HUF 60 billion to HUF 50 billion from the week starting on 23 August 2021. The Bank may depart from this arrangement in a flexible manner, depending on the supply and other market conditions. Subsequently, the Monetary Council will perform a comprehensive assessment of the government securities purchase programme at the end of each quarter, starting in September 2021. As part of this, the Council will take a decision on the next step of the withdrawal, and it will set a target amount for weekly purchases over the next quarter.
The MNB will start reducing purchases of shorter-term government securities. As a result, the share of longer-term government securities within weekly purchases will increase. The central bank will not sell the stock of government securities on its balance sheet, purchased government securities will be held to maturity. As it will be phased out gradually, the MNB will continue to use the programme taking a flexible approach to changing the quantity and structure of weekly purchases, to the extent and for the time necessary. In the Monetary Council’s assessment, a stable liquidity position in the government securities market remains crucial from a monetary transmission perspective; therefore, the MNB will stand ready to temporarily raise the volume of weekly purchases at any given time to maintain market stability.
At its June interest rate decision, the Monetary Council indicated that instruments supporting long-term sustainability will persistently remain part of the MNB’s set of instruments, while crisis management tools are being withdrawn. In order to support sustainability, the MNB successfully launched its Green Mortgage Bond Purchase Programme. At its meeting today, the Monetary Council has increased the available amount under the Bond Funding for Growth by HUF 400 billion to HUF 1,550 billion.
The Monetary Council is committed to maintaining price stability. In the decision-makers’ assessment, the Hungarian economy has successfully restarted. In light of the September Inflation Report, the Monetary Council will perform a comprehensive assessment of the results achieved by the cycle of interest rate hikes, and will identify risks to the inflation outlook. 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 8 September 2021.
MAGYAR NEMZETI BANK