Hungary c.bank says maintaining tight monetary conditions is warranted
Rationale published
The central bank has released its rationale for today's on-hold decision. The MNB remains extremely cautious about the rate path. Indeed, diverging monetary policies among the major central banks, heightened uncertainty, a volatile financial market environment and risks to inflation justify not only a pause in rate cuts but also the maintenance of tight monetary conditions.
Is the current exchange rate of the forint sufficient to achieve the inflation target?
In response to this question, Barnabás Virág said:
The narrative that has been built up in the markets about the Hungarian economy and economic policy is not correct, both fiscal and monetary policy are disciplined, and this could be a key determinant in the money market in the coming period, as the widening of the interest rate differential could also play an important role.
The interest rate differential should be sufficient and monetary conditions should be adjusted accordingly. In response to a question, Virág said that the central bank of an emerging market economy can never say that it will not raise interest rates and that such a statement is not warranted, especially in the current volatile geopolitical environment.
MNB: The message is clearer
The change in the last sentence of the Council's post-meeting statement is a clearer wording, with rate cuts taken off the table (there was no such proposal).
"This is the fourth interest rate decision with no change in the key rate," said Barnabás Virág when asked whether the cycle of interest rate cuts had come to an end.
Central bank focus areas
The central bank will focus its decisions in the near future on
- Inflation expectations
- Exchange rate developments
- Changes in commodity prices
- Developments in the external balance
- Inflationary developments
- Country-specific risks
- Changes in the international investment climate
Swap market remained stable during the positive period at the end of the year
The increase in the swap market rate to 6.0% from 5.5% was an effective move and will be maintained by the central bank. The spread between the swap market rate and the policy rate is the lowest in 4-5 years.
External balance
A current account surplus of 2.5-3% of GDP is possible this year, with Hungary's external position improving the most in the EU since 2022 (also strongly influenced by the large external energy dependence, which leads to a very large current account deficit in 2022).
Broader base for growth this year
On the income side, real wage growth, an increase in the family tax credit and the PMÁP interest rate are boosting growth, said Virág.
On the credit side, the recovery in household and business spending and in employee loans should help, he added.
In construction, growth will be supported by an increase in the order books and a strengthening housing market.
Mixed inflation picture
December's inflation data showed a strong repricing, and we will have to see what January and February bring in this respect, said Virág.
From February onwards, many strong base effects will be removed from the inflation index, which will put downward pressure on the 12-month price index, he added.
Both households' and companies' expectations for prices and inflation have also risen in recent months.
The message has changed: interest rates may remain unchanged for a longer period
Maintaining tight monetary conditions is justified. This is the new message, the previous one referred to a pause in interest rate cuts, this time there is no such reference to the possibility of easing.
A careful and patient approach to monetary policy remains warranted. In the Council’s assessment, geopolitical tensions, a volatile financial market environment, and risks to the outlook for inflation warrant the maintenance of tight monetary conditions,
the MPC said in its official statement.
Everyone voted in favour of unchanged rates
This time there was one proposal before the Monetary Council, to keep rates on hold . (This means that Deputy Governor Mihály Patai did not vote for a rate cut, as he had in the previous two months.)
December inflation was greater than expected
Global investor sentiment remains volatile, with gas and oil prices rising over the past month, said Barnabás Virág.
A divergence between the Fed and ECB monetary policy is expected, with European interest rates falling faster. This could boost risk aversion in emerging markets.
Inflation in December exceeded the central bank's expectations.
A warning sign for the inflation outlook is the increase in risk aversion, the volatile geopolitical environment and generally rising inflation expectations.
A disciplined anti-inflationary policy is needed, added Virág.
The fundamentals of the Hungarian economy are generally improving, with disinflation resuming from February.
The fundamentals for economic growth are broadening this year, he said.
