28 June 2022
At its meeting on 28 June 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 29 June 2022:
|Central bank instrument||Interest rate||Previous interest rate (percent)||Change (basis points)||New interest rate (percent)|
|Central bank base rate||5.90||+185||7.75|
|O/N deposit rate||Central bank base rate minus 0.50 percentage points||5.90||+135||7.25|
|O/N collateralised lending rate||Central bank base rate plus 2.50 percentage points||8.90||+135||10.25|
|One-week collateralised lending rate||Central bank base rate plus 2.50 percentage points||8.90||+135||10.25|
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 protracted Russia-Ukraine war has led to a general deterioration in the global economic outlook. Higher commodity and energy prices have caused significant increases in global inflation, which has been aggravated by ongoing supply disruptions.
There has been a general deterioration in investor sentiment since the end of May. Risk appetite has been driven by news on the war, expectations for interest rate increases by the world’s leading central banks, concerns caused by persistently high inflation, fears of recession and developments related to the coronavirus pandemic. Global prices of major commodities remain at high levels.
In response to persistently high inflation, monetary conditions have been tightened further by the world’s leading central banks as well as the region’s central banks. In June, the Fed continued to raise its policy rate taking a larger step and started to reduce its balance sheet. The European Central Bank signalled that it would cease its asset purchase programme (APP) in July and would start raising its policy rate. In the CEE region, the Polish and Czech central banks raised their key policy rates by 75 basis points and 125 basis points, respectively.
Hungarian economic growth has been slowing in response to the deterioration in external economic activity; however, annual dynamics remain buoyant. In April, industrial production and construction output continued to expand on an annual basis. The turnover of retail stores rose at a double-digit rate in April relative to a year earlier. The labour market continues to be tight and the unemployment rate remains low.
The time profile and structure of domestic GDP growth have strongly shown a dual nature in 2022. The rate of economic growth is expected to slow in the second half of the year. Components of domestic demand, particularly household consumption, are expected to contribute to growth this year. By contrast, net exports are likely to hold down the expansion. Looking forward, however, consumption and investment dynamics are also expected to slow considerably, while net exports are expected to make a positive contribution to GDP growth again as external markets and supply chains recover. Despite the temporary slowdown, the investment rate is expected to stabilise at a high level of above 27 percent on the forecast horizon. Hungary’s GDP is expected to grow by 4.5–5.5 percent in 2022, by 2.0–3.0 percent in 2023, and by 3.0–4.0 percent in 2024.
In May 2022, annual inflation was 10.7 percent and core inflation stood at 12.2 percent. Food prices rose at a rate above 20 percent relative to the same period a year earlier. Repricings continued to be much greater than usual in May, with rises in food prices accounting for nearly a half of the increase. External effects continue to quickly feed through to consumer prices. The Government’s measures affecting fuel and household energy prices are providing a significant cushion against the spillover of the increase in global commodity prices into domestic inflation. However, inflation expectations remain elevated.
Rises in energy, commodity and food prices are likely to raise domestic inflation further on the cost side. Price dynamics are expected to peak during the autumn months and then to decline at a modest pace. The future course of price cap measures is expected to have a significant effect on the timing of the peak and the subsequent inflation path. Preventing second-round effects and anchoring inflation expectations are crucial in terms of achieving the inflation target. Inflation is expected to return to the central bank tolerance band at the end of 2023, as the first-round effects of war tensions abate, external inflationary effects moderate, the inflationary effects of the tax measures announced in June fade and as a result of the proactive central bank measures, and then to meet the 3 percent central bank target in the first half of 2024. The consumer price index is expected to be between 11.0 percent and 12.6 percent this year, between 6.8 percent and 9.2 percent in 2023, and to be in line with the inflation target from 2024.
The measures announced by the Government and their implementation are expected to ensure that the fiscal objectives will be met this year and next. As a result of economic growth and declining deficit, the government debt-to-GDP ratio may fall from 76.6 percent at the end of the previous year to below 75 percent in 2022, followed by further declines of around 2.5 percentage points each year. The current account deficit is expected to temporarily rise further in 2022. The deterioration in the trade balance this year is likely to reflect the deterioration in the terms of trade due to high energy prices, the slowdown in external markets, and imports in connection with buoyant domestic demand. However, significant new export capacities have been built in recent years, and as a result, the external balance is expected to improve quickly as the global economic environment normalises. The economy’s net lending position may return to positive territory at the end of the forecast horizon.
Inflation risks have further intensified over the past quarter. Accordingly, compared to the March forecast, inflation path expected currently by the MNB has shifted upwards. Global inflation has risen to its highest level in a decade, which, coupled with money market volatility, poses a larger risk to the domestic inflation outlook.
Due to the increased challenges, the Monetary Council considers it necessary to close the gap between the base rate and the one-week deposit rate. The Council continues the interest rate tightening cycle by taking a decisive step in order to anchor inflation expectations and mitigate second-round inflation risks. In addition, it assesses that it is warranted to increase the one-week deposit rate to the level of the base rate at the weekly tender following the interest rate decision. 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 the rise in short-term risks in financial and commodity markets.
According to today’s decision of the Monetary Council, the central bank base rate was raised by 185 basis points to 7.75 percent. The overnight deposit rate was increased by 135 basis points to 7.25 percent, and the overnight and the one-week collateralised lending rates were increased by 135 basis points to 10.25 percent.
The central bank will extend the use of the foreign exchange liquidity providing swap facility from July 2022 and will stand ready to use it within quarter as well. The step is aimed at 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. By maintaining an active presence in the market, the MNB enhances the effectiveness of monetary policy transmission, thereby supporting the achievement and maintenance of price stability.
In the Monetary Council’s assessment, the upside risks to inflation have strengthened further. The risk of persistently high commodity and energy prices points to a prolonged period of high external inflation. Furthermore, high inflation may persist if strong price and wage dynamics build into economic agents’ expectations, resulting in second-round inflationary effects.
The Magyar Nemzeti Bank started the cycle of interest rate hikes one year ago, first among the central banks in the European Union. The further rise in inflation and persistent inflation risks warrant the decisive continuation of the tightening cycle. The MNB continuously monitors developments in financial market risks as well and stands ready to intervene in a flexible manner using every instrument in its monetary policy toolkit, if necessary. Maintaining tighter monetary conditions for a longer period is warranted to manage increasing second-round inflation risks resulting from persistently negative supply effects. 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 13 July 2022.
MAGYAR NEMZETI BANK