Hungary c.bank chief says rate hike cycle is closed
Three key decisions
The central bank has taken three important decisions today, said Matolcsy:
- Raising the base rate by 125 basis points to 13.00% from 11.75%.
- Concluding its 16-month rate hike cycle with this step.
- The monetary tightening of the MNB and the fight against inflation have not come to an end, but have been stepped up, and the fight is being pursued with greater emphasis on other instruments.
MNB does not want the 70s to be back
With the 2020s looking increasingly likely to resemble the 1970s, the MNB has been the first to start combating inflation and the 'return' of the 1970s, said the Governor. Hungary is facing a series of risks in addition to inflation and the energy price boom, with an unacceptably high public deficit and a current account deficit in dangerous territory.
We are not going any further [with rate hikes] because there is no point in going further upwards at a double-digit base rate, and there are also positive data coming out of the global inflation environment,
Matolcsy underlined.
Good transitions must continue
We need to return to a path of balanced growth, and we are telling all of us, the state, the business sector and families, to speed up the good transitions in Hungary, the energy efficiency transition, the digital transition, the reform of higher education, said Matolcsy. This, of course, requires capital, and a country can attract capital if its competitiveness improves.
Latest forecasts
The Monetary Council discussed and approved the central bank's new macroeconomic forecast.
Inflation will remain on an upward path in the coming months, but this is largely due to factors outside the control of monetary policy, such as changes in the overheads reduction rules and drought, said Deputy Governor Barnabás Virág.
"The growth outlook in the world in general has deteriorated, and we have lowered our forecast accordingly," he added. Risks for inflation have become balanced and risks for growth are pointing down, he said.
Tightening continues
Interest rate hikes are on hold, but monetary tightening continues to avoid second-round effects and anchor inflation expectations,
reiterated Virág.
Improvement in conditions
Previously, the central bank attached four conditions to the end of interest rate hikes:
- Our forward-looking real yield is now positive.
- The inflation outlook has turned balanced while it was pointing upward before.
- In recent months there has been a clear convergence of views between the Hungarian government and the European Commission.
- Monetary transmission has improved in both the FX swap market and the government bond market.
Inflation, growth
According to the latest inflation forecast, the rate of inflation is expected to return to the central bank's tolerance band in the first half of 2024, said Virág. Economic growth could slow down substantially compared to previous expectations, as reflected in the MNB's latest forecast.
Recession
On a quarter-on-quarter basis, we expect GDP to contract in both the third and fourth quarters, meaning that a meaningful decline could come after a strong first half, said Virág.
Here is the 20% inflation rate
Inflation may have risen to close to 20% in September, according to the central bank, partly due to the change in the overheads reduction rules, which alone adds 2.5-3 percentage points to inflation, and partly due to the rise in food prices caused by the drought. These two factors are outside the scope of monetary policy.
The disinflationary effects will be more pronounced from the beginning of 2023 onwards, both external and internal, the Deputy Governor underlined. Thereafter, the rate of price increases could fall below 10% in the second half of next year, and the central bank's tolerance band could be reached in the first half of 2024, in mid-2024.
Other measures possible
In order to improve the effectiveness of the monetary transmission, the MNB may decide on additional measures to further tighten monetary conditions,
underlined Virág.
The central bank's new discount bond will have a maturity of one week and will carry an interest rate equal to the base rate. And the announced long maturity deposit facility will start with a two-month maturity to facilitate year-end liquidity management.
Later on, this maturity will be gradually increased to three months. Its interest rate will be linked to the base rate, with a premium on top of the base rate, which will be set by auction, added Virág on the details of the new measures announced in August.
The central bank has a serious safety net
The MNB's foreign exchange reserve position is stable, with a reserve of €36.5 billion, which is substantially higher than the most frequently cited short external debt stock, stressed Barnabas Virág. In addition, the MNB has a very dense swap and repo network of more than €10 billion, which is another major asset.
We will continue to consider this network as an important element of our operations, and we will explore all possibilities to strengthen it further, if necessary, he added in response to a journalist's question.
In addition, the inflow of EU funds could also play a key role in boosting the reserve.
