Even the shadow of inflation needs to be erased in Hungary - rate-setter
A stability-focused monetary policy approach is a priority.
Inflation in October was below expectations, but the weakening of the forint in recent months will have an upward impact on inflation. At the same time, a number of counteracting factors are affecting the inflation outlook.
Serious progress has been made in inflation in 2024, but even the shadow of inflation needs to be erased to restart growth.
Two key factors in the Oct CPI
The significant decline in market services prices on a monthly basis was due to a significant, unprecedented fall in mobile phone and internet fees.
The October price fall could signal a correction in profit inflation in 2022-2023. Within this, the MNB highlights mobile phone and internet services, spirits and pet food. This is only one month's data, it remains to be seen whether we will see a sustained trend.
On the unchanged rates
Risk aversion has increased in emerging markets. The rise in domestic inflation to 3.2% [in October] was mainly driven by higher food and fuel prices. The economy's worse-than-expected performance in the third quarter was driven by industry, construction and agriculture.
According to the central bank, achieving the inflation target in a sustainable way is the basis for a pick-up in economic growth.
The base rate could remain at the current level for an extended period
The current environment continues to justify a disciplined, tight and patient monetary policy. The base rate could remain at current levels for an extended period, causing our relative interest rate spread to increase. Financial market stability is key to price stability, said Virág.
Three effects determine the inflation picture
- Food prices, which have been higher than the historical average.
- Exchange rate behaviour will also be important, as the forint has weakened by 4% against the euro and by 8% against the dollar since the beginning of September.
- Moreover, the valorisation of the excise tax system will have an inflationary impact next year.
It is important to note that the overall demand environment is disinflationary.
International picture
Global growth in the third quarter is characterised by a dichotomy, with the US posting good growth numbers while European growth slows.
In particular, economic growth in the Eastern European regions has been below expectations.
About growth in Hungary
Growth is supported by domestic consumption and the labour market. Household consumption grew by 3.9% and real wages by 9.9% in the first half of the year.
In contrast, in agriculture, the drought has reduced average yields. Exports remain weak, while lagging investment is also eating into growth.
Inflation is a major problem even according to surveys
According to the MNB's corporate survey, rising labour costs, price hikes by suppliers and high energy prices continue to pose problems for companies. A similar result was found in a survey by the National Association of Entrepreneurs and Employers (VOSZ), where inflation, economic policy and high tax burdens were the issues that respondents considered most problematic.
Serious risks remain in the geopolitical space
According to the Deputy Governor of the MNB, several decisions have been taken in recent days that could also increase geopolitical risks. For this reason, developments in oil prices and bond yields could be important in the coming periods.
USD strengthening bad for Hungary too
Capital outflows from emerging economies are due to the strengthening of the dollar. This is also bad for the forint.
At such times, it is important to do our homework and keep the Hungarian economy fundamentally strong. Significant progress has been made in this respect in recent times. The current account balance is in surplus, and Hungary is in the middle third of emerging countries in terms of budget balance and inflation. However, the outlook is positive. Although growth this year is below average, a substantial improvement in this position is expected next year.
This has improved our overall stability.
Budget deficit shrinking
The deficit reduction measures for 2024 support the achievement of the 4.5% deficit target, according to the MNB.
Financial stability is key
In view of the fundamentals, Hungary's position has improved over the past year and a half, but the external factors that shape the risk environment have changed.
Foreign short (betting on HUF depreciation) positions have increased, but stabilising domestic sector behaviour has dampened the weakening of the forint.
MNB needs to remain cautious
Global investor sentiment is volatile. The dollar-euro interest rate spread has widened and risk aversion towards emerging markets has increased. In addition, geopolitical tensions are on the rise.
Caution is still warranted, as households remain weary due to the high inflation experienced earlier, and inflation expectations are still volatile. Price dynamics will temporarily increase for the rest of the year, said Virág, meaning that inflation will accelerate.
The external interest rate environment has become more uncertain and may moderate more slowly than previously expected. In line with its previous practice, the central bank will closely monitor the expected year-end situation in the FX swap market and is ready to smooth financial processes in December.
New tenders on 18 December
On 18 December, the MNB will launch two additional FX swap tenders.
Here's what the MNB is focusing on
Based on incoming data, the Council takes month-by-month decisions on the level of the base rate. The central bank is closely following:
- the inflation outlook (anchoring of inflation expectations, volatile market environment and external inflation risks);
- Hungary's risk perception (external balance processes, disciplined achievement of budgetary targets);
- financial market stability (maintaining a positive real interest rate environment, developments in the global interest rate environment and investor sentiment).
The evolution of all these factors strongly influences the room for manoeuvre of monetary policy.
Looking ahead, a careful and patient, stability-oriented monetary policy is still warranted.
Not everyone voted to hold interest rates
Barnabás Virág said that there were no other options on the table other than the on-hold decision. The Monetary Council voted for this option by a large majority. There was one member who voted for a cut.
How long can interest rates stay at this level?
In response to a question from a journalist, the MNB Deputy Governor replied that as long as the external environment and the risks to the path of inflation next year warrant it, interest rates could stay at their current level. But for the time being, it is not possible to give a reliable forecast of how long this period will be.
What risks did Trump's election as president bring for the Central European region?
It is worth answering this question when we can see the specifics. That is, if we know what measures have been taken in relation to the US economy and foreign policy.
So far, all we can see is that money is flowing out of emerging countries and therefore a cautious monetary policy approach is warranted.
Will the central bank be profitable this year?
The mandate of the central bank is clear: to achieve price stability and ensure financial stability. If this is achieved, there is scope to support economic policy or green policy.
In this environment, the first two aspects are the important ones. Therefore, on this issue, the profit does not emerge as a mandate. The current situation has an impact on the result of the central bank, and this was also evident last year.
This year, the loss rate will almost certainly be significantly lower than in 2023. On the asset side, several steps have been taken to help reduce the loss (such as gold purchases).
But the task is not to manage the profit, but to ensure that the central bank achieves its goal.
Closing remarks
Overall, the MNB took a cautious approach, as the dollar strengthened a lot and US bond yields rose. This has led to stronger capital outflows from emerging countries. Inflation in Hungary picked up in October and the current weakening of the forint poses a risk to inflation next year.
The central bank will therefore keep interest rates at this level for as long as external and internal developments warrant.
Cover photo: Shutterstock
