22 February 2022
At its meeting on 22 February 2022, the Monetary Council reviewed the latest economic and financial developments and decided on the following structure of central bank interest rates with effect from 23 February 2022:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||2.90||+50||3.40|
|O/N deposit rate||Central bank base rate minus 0.00 percentage points||2.90||+50||3.40|
|O/N collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.90||+50||5.40|
|One-week collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.90||+50||5.40|
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 economic recovery differed from country to country in the fourth quarter of 2021: economic growth slowed in China and picked up in the US and the euro area. The coronavirus pandemic and varying recovery patterns continue to pose a risk to the global economic recovery. In recent months, inflation has risen to levels not seen for several decades in most of the countries, which has been aggravated by disruptions in supply across a growing range of markets, in addition to persistent rises in commodity, crop and energy prices.
Global investor sentiment has been volatile since the Council’s previous policy decision. Risk appetite has been driven by rising inflation, central banks’ monetary policy measures, movements in commodity and energy prices, increasing geopolitical tensions and developments related to Covid-19. Global oil prices rose to a seven-year peak in February, exceeding USD 95 per barrel. In Europe, electricity prices also rose and gas prices fell. In both cases, prices substantially exceed their levels recorded before the outbreak of the coronavirus pandemic.
The monetary policy stances of the world’s leading central banks have become tighter. In January, the Federal Reserve communicated that it could start raising the policy rate soon. The European Central Bank will discontinue its Pandemic Emergency Purchase Programme (PEPP) in March 2022. In the CEE region, the Czech, Polish and Romanian central banks raised further their policy rates.
Strong economic growth continued in Hungary in the fourth quarter of 2021, with GDP rising by 7.2 percent, exceeding expectations. Market services made the largest contribution to economic growth. In December, industrial output exceeded its pre-pandemic levels again, and domestic construction output was already above the trend seen prior to the crisis. The unemployment rate remains low in international comparison. The Hungarian economy showed a strong recovery throughout 2021. Hungarian GDP rose by 7.1 percent in 2021, representing a significant expansion which is at the forefront in Europe.
The Hungarian economy has a strong ability to grow. GDP is expected to grow by around 5 percent in 2022. The structure of economic growth shows a dual nature, which is likely to persist in the coming period. The further strengthening in domestic demand is offsetting the negative growth effects resulting from disruptions in international production chains and rising commodity, crop and energy prices. Household consumption growth continues, supported by the increase in the minimum wage 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. Although higher commodity and energy prices, coupled with weaker external demand, are likely to hold back corporate investment activity in 2022, the investment rate is expected to stabilise at a high level even in EU comparison. 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 2022, Hungarian exports are expected to rebound quickly as external markets and supply chains recover, which will also be supported by new export capacities.
In January 2022, annual inflation was 7.9 percent and core inflation stood at 7.4 percent. Headline inflation and core inflation rose by 0.5 percentage points and 1.0 percentage point, respectively, from the previous month. Incoming data exceeded expectations. Significant increases in processed food prices and, to a lesser degree, in industrial goods and services prices, contributed to the rise in inflation and core inflation. In January, a wide range of products and services were repriced to a greater than usual extent. There has been a general increase in the pace of repricing, due to the fact that rises in global commodity and energy prices have fed through quickly to consumer prices. Government measures affecting fuel, certain essential food products and residential energy prices cushion the spillover of the increase in global commodity prices into inflation in Hungary. Food prices exhibited a double-digit increase in January relative to the period a year earlier. The contribution of fuel prices to annual inflation remained significant. However, government measures slow the pace of increase in fuel prices. At the beginning of 2022, inflationary pressures increased; and inflation expectations have risen in recent months.
Inflation risks have increased since the Council’s previous policy decision. Inflation will begin to decline later than previously expected. Looking ahead, core inflation may pick up further in the coming months. Companies are repricing their goods and services at relatively short notice amid strong domestic demand in order to reflect rises in commodity prices and wage costs. The degree to which repricings take place in the coming months will determine the yearly dynamics of both inflation and core inflation.
The government deficit and the government debt-to-GDP ratio shifted to a declining path in 2021. According to preliminary data, the government debt-to-GDP ratio decreased to 78.2 percent at the end of 2021 from a level of 80.0 percent at the end of 2020. The Government lowered its 2022 budget deficit target from 5.9 percent to 4.9 percent, which, along with stronger-than-expected GDP growth, enables a faster decline in the government debt ratio. In 2021, the current account deficit amounted to some 3 percent of GDP, due in part to rises in commodity and energy prices and the fragmentation of supply chains. The balance is likely to improve gradually from the second half of 2022 as external markets and supply chains recover, which will be supported by new export capacities built up in recent years. At the same time, the economy’s net lending is likely to increase following a temporary decline in 2021 and 2022, and is expected to be around 1 percent of GDP at the end of the forecast horizon.
Inflation risks warrant a further tightening of monetary conditions. Consequently, the Monetary Council deems it necessary to continue the base rate tightening cycle on a monthly basis while gradually raising it to the level of the one-week deposit rate. The MNB remains ready to respond quickly and flexibly by changing the one-week deposit rate, if warranted by an increase in short-term risks in financial and commodity markets.
In order to anchor inflation expectations and mitigate second-round inflation risks, according to today’s decision of the Monetary Council, the central bank base rate was raised by 50 basis points to 3.40 percent. The overnight deposit rate was increased by 50 basis points to 3.40 percent, and the overnight and the one-week collateralised lending rates were increased by 50 basis points to 5.40 percent. The MNB will continue to set the one-week deposit rate at weekly tenders and will stand ready to raise it further if necessary. In line with the tightening monetary policy stance, the MNB decided to phase out the preferential deposit, related to its earlier tools supporting lending activity, from April 1, 2022.
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 that end, the MNB will actively use its swap instrument providing foreign currency liquidity starting as early as the beginning of March.
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. The Bank completed the withdrawal of its crisis management programmes in December 2021. Consistent with this, the MNB has not purchased government securities since December. The Monetary Council still finds it crucial to maintain stability in the government securities market. Accordingly, the Council is ready to intervene with occasional and targeted government securities purchases if necessary, which does not imply a change in the monetary policy stance.
In the Council’s assessment, the risks to the outlook for inflation have increased and continue to be on the upside. Based on incoming data, the risk of the alternative scenario related to higher external inflation environment has increased. Persistently high commodity, crop, food and energy prices and elevated international freight costs continue to point to sustained external inflationary pressures. At the same time, the tight labour market, coupled with accelerating 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 the continuation of the base rate tightening cycle on a monthly basis. As a result, the base rate will catch up gradually to the one-week deposit rate evolving in the coming months. However, by setting the one-week deposit rate, the MNB continues to stand ready to respond quickly and flexibly to short-term risks in financial and commodity markets if necessary. The Monetary Council will continue the cycle of interest rate hikes until the outlook for inflation stabilises around the central bank target 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 9 March 2022.
MAGYAR NEMZETI BANK