Inflation is no game, we can't sit back - Hungarian rate-setter warns

Monetary policy enters a new phase

From October, monetary policy enters a new phase, with the Monetary Council taking decisions in a step-by-step, prudent, data-driven manner, depending on the inflation path and risk perception, Barnabás Virág kicked off the press conference.

Domestic conditions are favourable

In October, domestic factors continued to support disinflation and the improving current account balance allowed interest rates to be cut. At the same time, a more uncertain external environment warranted a slowdown in the pace of interest rate cuts, said the Deputy Governor.

Inflation is not a game, we cannot sit back! Disinflation must continue in 2024, supported by a positive real rate,

concluded Virág. He added that risk perceptions will continue to weigh heavily in future decisions.

Positive real interest rate remains

The real interest rate in Hungary moved into positive territory in September and is expected to rise further by the end of the year, with inflation falling substantially. The economy may have emerged from recession in the third quarter, with high frequency data suggesting that the recovery may have begun, said Virág. The improvement in the current account balance is also a major positive development, with the latest data confirming the view that our financing position could be even better than expected, he added.

Sentiment turning sour

The rise in developed market yields over the past month is a sign of worsening investor sentiment, as is the eruption of the Gaza conflict. The higher yield environment has created a new interest rate environment in the world, with positive real interest rates returning to developed markets after more than a decade, said Barnabás Virág. For emerging markets, this has a draining effect to which emerging economies need to respond. This reaction is also the creation of a positive real interest rate environment for most countries, he added.

An economic historical event

Reducing inflation from persistently above 20% to single digits within a year is an event in economic history, but the rate of price increases will have to be reduced further in 2024, said Virág.

Fuel price margins fall

Margins on the fuel market have recovered to higher levels following the phasing out of the price freeze, and we called for a necessary narrowing of these margins at the beginning of the year. The start of consultations with the government in recent weeks has been a very positive development in this respect, and the effect of this is already visible in the narrowing of margins, which could reduce inflationary effects in the coming months, said Virág.

Central bank to maintain caution

Inflation is expected to be 7-8% at the end of the year, but caution may still be warranted as external pressures strengthen, said Virág. Stability on the money market remains a key to achieving price stability, and the central bank will continue to make data-driven decisions on interest rates in the coming months, based on an analysis of incoming data and the risk environment. To strengthen communication, the central bank will continue to publish a flash analysis of GDP, inflation and balance of payments developments on the day the data are released, said Virág.

11% base rate at the end of the year could be realistic

The year-end interest rate expectation of investors is around 11%, which is a realistic scenario based on our current information,

said Barnabas Virág. This could mean a steadily rising real interest rate on top of the already mentioned 7-8% inflation.

Assuming a 11% base rate for year-end, we may see a 75bp and a 50bp reduction in November and December, respectively.

What proposals have been discussed?

There were several options on the table, ranging from a 100-basis-point rate cut to a 50bp reduction, but in the end the Monetary Council decided that the external environment warranted caution, even with macroeconomic conditions improving, Virág underlined.

From profit growth to wage growth

In 2024, the Hungarian economy has a good chance of achieving a balanced economic growth structure, with both internal and external drivers supporting growth. And this structure should not be a drag on the disinflationary process, as a very significant surplus in business income has emerged over the last year and a half. If more and more of this is channelled over to employee wages, then there should be no substantial change in pricing practices, and

what used to be a profit increase could become a wage increase in 2024,

the Deputy Governor underlined.

How important is the retrospective real interest rate?

In the current context, it may be justified to emphasise the retrospective real interest rate. When one comes from a high inflation environment, this environment gets represented even when looking forward, i.e. our past experience makes its way also to the forward-looking indicator. Both indicators need to be paid close attention to, and the MNB is doing exactly that, said Barnabas Virág.

More to follow!