25 January 2022
At its meeting on 25 January 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 26 January 2022:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||2.40||+50||2.90|
|O/N deposit rate||Central bank base rate minus 0.00 percentage points||2.40||+50||2.90|
|O/N collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.40||+50||4.90|
|One-week collateralised lending rate||Central bank base rate plus 2.00 percentage points||4.40||+50||4.90|
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. Meanwhile additional waves of the coronavirus pandemic have 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, crop and energy prices.
Global investor sentiment has been mixed since the Council’s previous policy decision. Risk appetite has been driven by rising inflation, movements in commodity and energy prices, and the spread of the Omicron variant of coronavirus. Global gas and electricity prices fell significantly from their peak reached at the end of the year. After a temporary reversal in December, the global market price of crude oil rose sharply in January and it remains significantly above its level a year earlier. The US dollar showed a mixed performance against developed market currencies and mostly depreciated against emerging market currencies.
The monetary policy stances of the world’s leading central banks have become tighter. At its December meeting, the Federal Reserve decided to phase out its asset purchase programme at a faster pace, which therefore may be entirely discontinued already in March 2022. Based on market expectations, the base rate will be raised four times this year. In December, the European Central Bank decided to slow the pace of its asset purchases. In the CEE region, the Czech, Polish and Romanian central banks raised their policy rates, and further interest rate hikes are expected by the market.
The Hungarian economy grew strongly throughout 2021. High frequency data suggest strong economic activity in the fourth quarter of 2021. In November, industrial output picked up, again exceeding its pre-pandemic levels; however, the global shortage of semiconductors continues to pose a risk. Based on business surveys, industrial production remained strong in December. In addition, the sectors linked to domestic demand (construction, retail sales) also grew at a fast rate. Annual GDP growth in 2021 may have exceeded the 6.3–6.5 percent level projected in the December Inflation Report. The unemployment rate remains low in international comparison.
The Hungarian economy has a strong ability to recover. GDP is expected to rise by 4.0–5.0 percent in 2022, which is at the forefront in the EU. 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. Higher commodity and energy prices, coupled with 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 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 December 2021, annual inflation was 7.4 percent and core inflation stood at 6.4 percent. Headline inflation remained unchanged and core inflation rose by 1.1 percentage point compared with the previous month. A highly unusual repricing pattern was observable in December, which appeared in a wide range of goods and services. Inflationary pressures have strengthened, and inflation expectations rose in previous months. The rate of increase in food prices accelerated significantly, while the inflation of goods and services rose to a lesser degree. The contribution of fuel prices to annual inflation continued to be strong. Overall, consumer prices rose by 5.1 percent and average core inflation stood at 3.9 percent in 2021.
Inflation and core inflation are expected to follow divergent paths in the coming months. Inflation may have approached its peak in December; however, it may begin to decline later than previously expected. Core inflation is expected to pick up further in the coming months. Companies are repricing their goods and services at short notice amid strong domestic demand in order to reflect rises in commodity prices and wage costs. The degree to which repricings take place during the beginning of the year will determine the yearly dynamics of both inflation and core inflation.
According to available data, the government deficit and the government debt-to-GDP ratio shifted to a declining path in 2021. The Government lowered its 2022 budget deficit target from 5.9 percent to 4.9 percent by rolling over certain government investments, which, along with stronger-than-expected GDP growth, enables a faster decline in the government debt ratio. In November, the trade balance turned into a surplus, reducing the current account deficit, which was around 3 percent in 2021. The balance is likely to deteriorate due to the temporary effects of the pandemic, but to increase 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. By setting the one-week deposit rate, the MNB responded quickly and firmly to risks in financial and commodity markets of recent months. These risks have abated since December, while the sharp increase in core inflation signals an increase in persistent inflationary pressures. In the Monetary Council’s assessment, the catching up of the base rate to the level of the one-week deposit rate is warranted. Accordingly, the Council will continue the cycle of base rate hikes at a monthly frequency and in larger increments than in December. Meanwhile, the Bank will further tighten monetary conditions by raising also 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, the Monetary Council started the catching up of the base rate to the one-week deposit rate at its meeting today. According to the January decision, the central bank base rate was raised by 50 basis points to 2.90 percent. The overnight deposit rate was increased by 50 basis points to 2.90 percent, and the overnight and the one-week collateralised lending rates were increased by 50 basis points to 4.90 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 the Monetary Council’s assessment, the MNB, through an active market presence, cushioned the spillover of tensions in international swap markets to the domestic market at end of 2021 and facilitated the efficient sterilisation of financial system liquidity, thereby contributing to the tightening 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. Rising yields as a result of the interest rate hikes and the expected gradual fall in inflation are likely to lead to a continuous increase in real interest rates this year.
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 inflation 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 and in greater increments than in December. 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 February 2022.
MAGYAR NEMZETI BANK