Hungary cenbank doubles firepower of 'wonder weapon'

The primary objective of the National Bank of Hungary (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Bank preserves financial stability and supports the Government’s economic policy. This is the usual first paragraph in the MPC's offiical post-meeting statement. The Council has left rates on hold today.

Global macroeconomic and financial developments continue to be driven mainly by the events of the coronavirus pandemic and the news related to the development of the vaccine. Following a decline in the second quarter of 2020, the performance of large economies showed significant reversal in the third quarter, although it continued to fall short of the level seen a year earlier. Since mid-October, infection curves in several countries have risen sharply; therefore, governments decided to take restrictive measures.

Due to the increasingly stronger restrictions introduced, the economic recovery is expected to be delayed. As a result, there remains an exceptionally high uncertainty surrounding the rate of global economic recovery

, the MPC said.

In respect of the Hungarian economy, the Council noted that at the onset of the second wave of coronavirus, the economic recovery slowed and the additional significant restrictive measures, introduced to control the pandemic, may cause a delay in the restoration of economic growth.

In the Monetary Council’s assessment, consistent with the risk scenario highlighted in the September Inflation Report, the increase in risk aversion vis-à-vis emerging markets continues to pose the greatest risk in terms of the outlook for inflation. It is the MNB’s clear intention to prevent the current uncertain global market environment from causing an increase in upside risks to inflation.

In response to the adverse economic effects arising from the coronavirus pandemic, the MNB expanded significantly the central bank balance sheet and thereby supporting the recovery of economic growth as well. The central bank balance sheet has contracted in recent years creating sufficient potential to address economic challenges in a sustainable manner. The MNB’s balance sheet can still be considered of average size in regional comparison, despite a significant expansion this year.

The MNB will be ready to expand its balance sheet further to manage risks arising from the coronavirus pandemic and to foster the quick recovery of sustainable economic growth.

At its meeting today, the Monetary Council performed the technical revision of its government securities purchase programme. In the Monetary Council assessment, the programme has been successful. The stock of government securities in the Bank’s balance sheet has increased by over HUF 700 billion since May 2020.

The next milestone was set to HUF 2 trillion, that's when the technical revision is due.

Government securities purchases by the Bank contributed to maintaining a stable liquidity position in the government securities market and strengthened the effectiveness of monetary policy transmission. The MNB continues to use the government securities purchase programme and to settle for a lasting market presence in the government securities market. The MNB will use the programme to the extent and to the time necessary. The Bank applies a flexible approach to the amount of its weekly purchases, concentrating its purchases on longer maturities. The Council has proceeded without setting a total amount to the government securities programme.

The Monetary Council will perform the next technical revision when the stock of purchases reaches HUF 2,000 billion while continuously monitoring the implementation of its asset purchase programme.

The utilisation of the Funding for Growth Scheme Go! exceeded HUF 1,000 billion by mid-November; therefore, at its meeting today, the Monetary Council decided to raise the total amount of programme by HUF 1,000 billion as well. The FGS Go! plays a key role in mitigating the adverse economic effects of coronavirus as it offers cheap funding with reliable rates to the SME sector with the most favourable conditions ever and a wide range of applications. There has been significant interest by companies in the FGS Go! since it was launched in April. Under the scheme, 15,000 companies have accessed favourable funding until mid-November. During the economic recovery, it is of key importance for the Monetary Council to provide the amount of funding required for the continuous operations of SMEs and the realisation of their investment projects, which also fosters the recovery of economic growth.

The MNB will continue to set the one-week deposit rate at weekly tenders, in response to the increase in risk aversion vis-à-vis emerging markets. The Bank will maintain the difference between the base rate and the one-week deposit rate as long as warranted by inflationary risks.

In the Monetary Council’s assessment, the monetary conditions established at the short end support 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 MNB remains committed to maintaining price stability during the coronavirus pandemic. Consequently, the Council continuously assesses incoming data, closely monitors the persistence of inflationary effects resulting from the restoration of the economy and the possible inflationary effects of financial market developments. If warranted by a change in the outlook for inflation, the MNB will be ready to use the appropriate instruments.

The abridged minutes of today’s Council meeting will be published at 2 p.m. on 2 December 2020.

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