Unpleasant food price surprises in Hungary are also "on the cards" - c.banker
Economic assessment
Overall, risk appetite in the world has improved since the last interest rate decision, but developments related to the Russia-Ukraine war remain a significant risk for the region, said MNB Deputy Governor Barnabas Virág.
High-frequency data point to a further decline in domestic demand, while manufacturing for foreign trade still expanded in September. Together, the two bring an improvement in the current account balance. In the central bank's view, the pace of economic growth is expected to slow further in the coming months, as indicated by the decline in domestic demand and the fall in energy consumption.
Inflation could turn around in early 2023
From early 2023 onwards, downward factors will become more pronounced in Hungarian inflation, leading to a gradual turnaround in inflation, the stressed Virág.
Tight monetary conditions to be with us for a long time
The MNB will hold a two-month deposit tender at the end of November to tie up banking sector liquidity over a longer term. Furthermore, from the beginning of December the Bank will again hold FX swap tenders providing euro liquidity and discount bill auctions with maturities extending beyond the end of the year.
Virág said the measures taken in mid-October (daily one-day deposit quick tenders) have been successful and will be maintained until risk perceptions improve in a sustained and steady manner, so
tight monetary conditions will be maintained for a long time.
Current account balance improving
The European economy performed better than expected in the third quarter, and the good performance of Hungarian exports also owes to this, with the automotive industry and electronics being the main contributors. This, combined with the significant fall in world gas prices, is improving the current account deficit, and we think we are already past the trough in this respect, said Virág.
Food can still surprise us
Rising food prices have been the main driver of the acceleration of inflation in recent months and this trend is expected to continue, i.e.
inflation is expected to rise further, with the possibility of unpleasant surprises.
Need every tool
For the MNB, preserving market stability and strengthening transmission remain key, the Deputy Governor stressed in respect of monetary policy. While maintaining the base rate, the tightening of liquidity will continue and the aim remains to improve the efficiency of monetary transmission.
We need all transmission channels, especially the exchange rate channel, to bring inflation into an acceptable range,
he said.
Additional tools to strengthen transmission
Around half of liquidity is now held in long-term deposits and the reserve account, while the other half is held in overnight deposits, stressed Barnabas Virág. With the central bank tenders to be announced in December, the MNB aims to further strengthen the transmission. With these instruments, the central bank will support liquidity absorption over the entire relevant time horizon.
We will use the one-day deposit accelerator as long as it is essential and key to market stability,
said Virág. Only in the event of a sustained, trend-like improvement in the financial market situation is it possible to gradually lower the policy rate. The central bank is monitoring six risk factors as a priority:
- Changes in the external environment
- Russian-Ukrainian war
- European energy crisis
- Tightening cycle of major central banks
- Current account developments
- Agreement on EU funds
Of these, there are signs of a positive shift in international sentiment and the current account, but it cannot be described as a trend for the time being, so a wait-and-see approach is warranted. For the other factors, the outlook is unchanged from the last interest rate decision.
What does the MNB say about the government dabbling in deposits?
The central bank's position has been unchanged since we entered a higher inflation environment. We believe that achieving price stability is the key, there is no alternative to breaking inflation, and we need all channels of monetary transmission to achieve this. With the government measures taken yesterday, we need some more time to see how this will affect the different sub-markets, said Barnabas Virág on the deposit rate cap announced on Monday.
We continue to believe that current interest rate levels are needed in all relevant sub-markets to bring inflation down
he stressed.
The big question in the coming days will be how markets that are not affected by the government's announcement will react to the measure. No significant shifts in one-day deposits are expected in the short term, according to Virág. Therefore, the decision will not have a significant impact on the central bank's earnings.
Government and central bank keep conversing
We are in constant consultation with the government on issues affecting the Hungarian macroeconomy, as we have been in the past, and we have made our views known whenever similar measures have been taken, said Virág.
It is still too early to judge how different markets may react to the measure revealed on Monday, but we for our part intend to continue to set monetary conditions in such a way that price stability is achieved in 2024, the MNB Deputy Governor added.
What about EU funds?
No agreement on the unblocking of EU funds has been reached yet, and when it is, we will have to see whether this will trigger a lasting, trend-like change in the risk perception of Hungarian assets, said Virág in response to a question on EU funds.
When will inflation peak?
Inflation could remain on an upward path until the end of the year, with food price rises posing an upside risk, Virág reiterated. However, at the beginning of 2023, international trends and the fall in domestic demand point to a turnaround in the first quarter. However, the turnaround will be very slow and gradual, with a meaningful decline in inflation only likely in the second half of next year, he added.
Cover photo: Portfolio
