Hungary central bank issues statement after 50bp rate cut
The key changes
According to the Monetary Council's official post-meeting statement:
Looking ahead, risks surrounding global and domestic disinflation and volatility in international investor sentiment warrant a careful and patient approach to monetary policy.
A month ago, after the Council slowed the easing pace to 50 bps, it said: "According to the assessment of the Monetary Council, the outlook for inflation warrants further reduction in the base rate at a slower pace than earlier. The volatile risk environment continues to warrant a careful and patient approach to monetary policy."
Now the central bank has rephrased these key two sentences to mention risks to the inflation outlook, justifying the need for a cautious approach.
The last sentence of the rationale has also been slightly modified (although the data-driven phrase has been retained), as a month ago the central bank was still emphasising the slowing pace: "In the new phase which started in April, the Monetary Council is proceeding at a slower pace than before, and will take decisions on any further reductions in the base rate in a data-driven manner."
The current statement is slightly different, with the MPC adding "cautious": "The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment and will take decisions on any further reductions in the base rate in a cautious and data-driven manner."
Here's the rationale in its entirity
The primary objective of the Magyar Nemzeti Bank (MNB) is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.
In Europe, risks to the short-term outlook for economic growth are skewed mainly to the downside; however, confidence indicators improved in 2024 Q1. Despite the slight slowdown in the first quarter, the US economy continues to grow steadily; however, employment growth moderated in April. The Chinese economy expanded at a rate above expectations in 2024 Q1, primarily reflecting the effects of economic policy measures aimed at stimulating demand.
Annual inflation in the euro area remained unchanged in April relative to the previous month, while consumer price increases slowed slightly in the US. In the global economy, services inflation has been generally higher compared to the levels seen before Covid-19, which restrains disinflation. In addition, geopolitical conflicts may increase volatility in the energy market and may cause disruptions in global value chains, leading to a renewed rise in freight costs. However, looking-ahead, subdued global economic demand points to moderate inflation rates. Oil prices have been falling and gas prices have been fluctuating in the range of around EUR 30 in the period since the Council’s previous interest rate decision.
International risk appetite has increased since the April policy decision. Based on market pricing, the Federal Reserve may start cutting interest rates later than the European Central Bank. The expected divergence between monetary policies of two of the world’s leading central banks may lead to increased volatility in emerging markets through the global interest rate environment. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points to 5.25 percent in May, while the Polish and the Romanian central banks left monetary conditions unchanged.
In 2024 Q1, Hungarian economic growth picked up. Domestic economy grew by 1.1 percent in annual terms and by 0.8 percent on the previous quarter. Market services were the largest contributors to economic growth; however, the decline in value added in industry hampered economic performance. In March 2024, industrial production and construction output fell, while the volume of retail sales rose. As regards the main determinants of household consumption, the significant rise in real wages seen since September 2023 is expected to continue this year. The gradual improvement in the consumer confidence indicator reflects an easing of the precautionary motive. Labour market tightness has eased over the past months. With a high level of employment, the unemployment rate stood at 4.6 percent in 2024 Q1.
In 2024, the gradual expansion in Hungary’s GDP will be mainly supported by domestic demand components. Economic growth is likely to accelerate further in the second half of the year. Persistently weak European economic activity is holding back export performance, while significant capacity-enhancing foreign direct investment projects are gradually stimulating it. In 2024, GDP may grow by 2.0-3.0 percent based on the MNB’s projection. Balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase.
In April, domestic consumer prices rose by 3.7 percent in annual terms, and as a result, inflation has been within the Bank’s tolerance band since the beginning of the year. Annual core inflation declined further by 0.3 percentage points to 4.1 percent. Inflation was in line with the projection in the March Inflation Report. Household inflation expectations remained broadly unchanged in April relative to March.
The pace of price increases will rise temporarily in the middle of this year due to the backward-looking pricing of market services and base effects. The decline in core inflation capturing underlying developments will stop in the second quarter and core inflation will fluctuate between 4.5 and 5.0 percent in the remainder of the year. Anchoring inflation expectations, preserving financial market stability and disciplined monetary policy are crucial for the consumer price index to return into the central bank tolerance band on a sustained manner from next year.
In March, the current account surplus rose to another historically high level. Exports and imports are expected to grow at nearly the same rate this year, and as a result, the improvement in the trade balance will be driven mainly by an improvement in the terms of trade due to lower energy prices. The current account surplus as a share of GDP is expected to rise further in 2024, and the balance is likely to continue to improve in the coming years, in parallel with an increase in Hungary’s export market share.
According to the MNB’s projection, the government deficit may decline in 2024, with the primary balance improving to reach near equilibrium levels again after five years. Gross government debt fell to 73.5 percent of GDP by the end of 2023. For the debt ratio to decline continuously in 2024 and Hungary’s risk perception to improve, it is also necessary to achieve the set deficit targets in a credible manner.
The starting economic growth in Hungary, historically high foreign exchange reserves, a persistent improvement in the current account balance and a cautious approach to monetary policy have contributed to an improvement in the country’s risk perception. However, the volatile financial market environment and the risks to the outlook for inflation continue to warrant a careful and patient approach. In line with this, at its meeting today, the Monetary Council cut the base rate by 50 basis points to 7.25 percent. Accordingly, the lower bound of the interest rate corridor, i.e. the O/N deposit rate, will be reduced to 6.25 percent, while the upper bound, i.e. the O/N lending rate, will be lowered to 8.25 percent. Monetary policy continues to contribute to the maintenance of financial market stability and the achievement of the inflation target in a sustainable manner by ensuring positive real interest rates.
Looking ahead, risks surrounding global and domestic disinflation and volatility in international investor sentiment warrant a careful and patient approach to monetary policy. The Council is constantly assessing incoming macroeconomic data, the outlook for inflation and developments in the risk environment and will take decisions on any further reductions in the base rate in a cautious and data-driven manner.
The abridged minutes of today’s Council meeting will be published at 2 p.m. on 5 June 2024.
Cover photo: Getty Images
