26 April 2022
At its meeting on 26 April 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 27 April 2022:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||4.40||+100||5.40|
|O/N deposit rate||Central bank base rate minus 0.00 percentage points||4.40||+100||5.40|
|O/N collateralised lending rate||Central bank base rate plus 3.00 percentage points||7.40||+100||8.40|
|One-week collateralised lending rate||Central bank base rate plus 3.00 percentage points||7.40||+100||8.40|
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 Russia-Ukraine war that broke out at the end of February fundamentally changed the global economic outlook. Due to the geographical proximity and a larger share of trade with the two parties involved, the events are expected to have a greater effect on the European economy, especially in the Central and Eastern European region. Reaching decade highs, inflation continued to rise in a number of countries. The war has raised inflation through higher commodity and energy prices, which has been aggravated by ongoing supply disruptions.
Global investor sentiment has been mixed since the Council’s previous interest rate decision. Risk appetite has been driven by news on the war and expectations for the Federal Reserve’s (Fed’s) rate hike, as well as developments related to the coronavirus pandemic. As a result of the war and the sanctions imposed on Russia, commodity prices initially soared amid high volatility which was followed by a correction in April: global oil prices fell to around USD 105. However, the price of natural gas remains at high levels.
In response to high inflation becoming increasingly persistent, the world’s leading central banks have adopted a tighter monetary policy stance even amidst deteriorating prospects to economic growth in recent months. The Fed started raising the policy rate in March. The European Central Bank discontinued its Pandemic Emergency Purchase Programme (PEPP) at the end of March. In addition, in April, the Governing Council decided to cease its asset purchase programme (APP) in the third quarter of 2022. In the CEE region, the Czech, Polish and Romanian central banks continued to raise their key policy rates.
Hungarian GDP rose by 7.1 percent in 2021. In addition to a significant carry-over effect, Hungarian economic growth continued to be strong at the beginning of 2022 despite the war situation. Based on high-frequency data, the annual growth rate is at the forefront of Europe, still well above the EU average. Industrial production and construction output continued to grow in February. In addition, the turnover of retail stores increased significantly. The unemployment rate remains low in international comparison.
The Hungarian economy continues to have a strong ability to grow. The short-term economic outlook is determined by the consequences of the war and the policy of sanctions implemented, and the governments’ responses to this extraordinary situation. The dual nature of economic growth is expected to persist in the coming period. Strong domestic demand may partly offset the adverse effects of the Russia-Ukraine war on growth. Exports are expected to make a smaller-than-expected contribution to GDP growth in 2022; however, exports might grow again from the end of 2022 as external markets and supply chains recover. Household consumption will be bolstered by rises in wages and by the government measures aimed at boosting household income. Due to an increasingly uncertain economic outlook and a rising interest rate environment, credit growth may generally slow down. Depending on the duration of the war and the policy of sanctions, GDP is likely to expand at a slower rate than expected, by 2.5-4.5 percent in 2022, then by 4.0–5.0 percent in 2023, and by 3.0–4.0 percent in 2024.
In March 2022, annual inflation was 8.5 percent and core inflation stood at 9.1 percent. Headline inflation rose by 0.2 percentage points and core inflation by 1.0 percentage point from the previous month. After the first few months of the year, there were also greater-than-usual repricings in March, which is due to the fact that rising global commodity and energy prices are quickly and widely reflected in consumer prices. External, cost-side effects are decisive in the short-term evolution of inflation. Government measures affecting fuel, certain essential food product and residential energy prices cushion the spillover of the increase in global commodity prices into domestic inflation. However, inflation expectations remain elevated.
Strong negative supply effects are likely to raise inflation further in the second quarter of 2022. The course of inflation in 2022 will depend mainly on the effects of the war and the sanctions on commodity markets, as well as on the governments’ responses to the extraordinary situation. Core inflation will also rise further in the coming months. With the fading of the first-round effects of the war and the sanctions, the decrease in external inflationary effects and as a result of the central bank’s measures, inflation is expected to return to the central bank tolerance band in the second half of 2023 before reaching the central bank target of 3 percent in the first half of 2024. The consumer price index is expected to be 3.3–5.0 percent in 2023, before falling in line with the inflation target from 2024.
The government deficit and the government debt-to-GDP ratio shifted to a declining path in 2021. The government debt-to-GDP ratio decreased to 76.8 percent at the end of 2021. The Russia-Ukraine war has increased budgetary risks through several channels, but a further decline in the debt ratio, in addition to strong nominal growth, could be ensured by maintaining budget deficit targets. Weak external demand due to the war on the export side and high energy prices on the import side both point to a deterioration in the trade balance in 2022. The external balance may start to improve rapidly from 2023, as a result of which the current account balance is expected to turn positive again by the end of the forecast period.
The Russia-Ukraine war has posed a much higher risk than usual to the outlook for inflation. The Monetary Council deems it necessary to continue the tightening of monetary conditions and to continue the base rate tightening cycle by taking a decisive step 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 100 basis points to 5.40 percent. The overnight deposit rate was increased by 100 basis points to 5.40 percent, and the overnight and the one-week collateralised lending rates were increased by 100 basis points to 8.40 percent. The MNB continues to stand ready to respond quickly and flexibly by setting the interest rate on the one-week deposit instrument if warranted by short-term risks in financial and commodity markets. The MNB will continue to set the one-week deposit rate at weekly tenders; however, the central bank normally determines the one-week deposit rate on a monthly basis.
In the Monetary Council’s assessment, maintaining an active presence in the market, the MNB has managed to cushion the spillover of tensions in international swap markets to Hungary at the end of the quarter and has facilitated the efficient sterilisation of financial system liquidity, thereby contributing to the tightening of monetary conditions. The Bank places even greater emphasis than previously on ensuring that short-term rates in every sub-market, particularly in the swap market, and at all times develop consistently with the level of short-term rates deemed optimal by the Monetary Council.
The Monetary Council attaches great importance to ensuring that every element of the Bank’s monetary policy toolkit supports the return to price stability. With the exhaustion of the maximum amount allocated under the programme and the realization of issuer negotiations, the Bond Funding for Growth Scheme (BGS) has been closed. In the Monetary Council’s assessment, the BGS has reached the goals set at the start of the programme.
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.
Mitigating increased fundamental inflation risks and driving expectations appropriately make it necessary to continue the base rate tightening cycle in the coming period. The base rate will gradually catch up to the level of the one-week deposit rate evolving in the coming months. Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects. In the current turbulent period in financial markets, a key task for the MNB is to ensure market stability, in addition to meeting its primary objective of price stability. If necessary, the MNB stands ready to intervene using every element in its monetary policy toolkit to ensure financial market stability. 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 11 May 2022.
MAGYAR NEMZETI BANK