Hungarian central bank seen cutting 2020 growth forecast to recession

"The global deterioration in recent weeks in the pandemic situation raises external risks, while expenditures related to economic defence result in a higher government financing requirement. To maintain the effectiveness of monetary transmission and the stable liquidity position of the government securities market, the Monetary Council deems it necessary to increase the amount of weekly government securities purchases, in addition to keeping the long-term collateralised lending facility. The Bank will continue to make purchases in the long segment to support an extension in the maturity structure of government debt," the MPC statement showed.

The bank also made key remarks about the consumer price index and GDP.

As a result of the economic shutdown, production in most sectors of the national economy declined. Consequently, Hungarian GDP fell by 13.6% year-on-year in the second quarter of 2020. "Due to the weaker-than-expected GDP data, a revision of the economic outlook for this year has become necessary, which will be made in the projection of the September Inflation Report. Successful health defence continues to provide an appropriate foundation for the economic recovery."

The central bank currently forecasts 0.3-2.0% GDP growth for Hungary for this year, while the rest of the world projects deep recession. In view of the bank's above remark, the MNB is likely to revise its growth estimate to recession shortly.

"A pick-up in public investment and an expansion in corporate lending are required for a ʻVʼ shape economic recovery in the second half of the year. In line with the expected slower recovery in the external environment, production in export-oriented industrial sectors may pick up only towards the end of the year," said the MNB.

In July 2020, inflation stood at 3.8% and core inflation excluding indirect tax effects was 4.1%.

"Incoming data exceeded expectations. In the period when the economy was restarted, a faster rise in prices was mainly caused by changes in the structure of aggregate supply and demand. In specific sub-markets demand was soaring, while the recovery of disrupted supply caused by the pandemic situation was slow in others.

"The consumer price index is expected to remain around its current level in the coming months, before inflation stabilises at close to the central bank target of 3% as economic activity is brought back to normal. Disinflationary effects of the coronavirus pandemic become even stronger over the forecast horizon. Deteriorating economic activity due to the pandemic is likely to reduce core inflation excluding indirect tax effects through several channels. In addition to a weaker external inflation environment, more muted domestic demand compared to previous years is also increasingly restraining underlying inflation. The Monetary Council monitors closely the persistent inflationary effects as the economy recovers."

It is particularly interesting to see that while inflation unexpectedly surged in July the MNB addresses factors that should dampen inflation, while it apparently sees no upside risks. .

The central bank does not seem have plans to change the 0.6% base rate any time soon.

"In the Monetary Council’s assessment, the 0.60% base rate supports price stability, the preservation of financial stability and the recovery of economic growth in a sustainable manner. In the current rapidly changing environment, it is key to maintain short-term yields at a safe distance from a range close to zero. The Council continuously assesses incoming data and changes in the outlook for inflation."

The paragraphs stressing the expected deceleration in inflation pave the way for the closing remark that raises the idea of further monetary easing.

"In the event of a persistent deterioration in the outlook for growth, the Bank will deliver the required additional economic stimulus using its targeted instruments, i.e. the Funding for Growth Scheme Go! and the Bond Funding for Growth Scheme, providing the most direct support to investment."

Cover photo: Getty Images