Published: December 20 2023
The Hungarian central bank (NBH) has announced a reduction in the base rate by 75 basis points, bringing it down to 10.75 percent. This decision was made at a regular policy meeting and is in line with the previous rate-setting meeting in November. In addition to the base rate cut, the NBH also lowered the symmetric interest rate corridor. This article will provide an overview of the key points discussed during the meeting.
Reasoning behind the decision
In a statement released after the meeting, the NBH's Monetary Council explained that the decision to lower the base rate was influenced by the risks associated with global disinflation and volatility in international investor sentiment. The Council emphasized the importance of a data-driven approach and stated that future decisions regarding rate reductions will be based on incoming macroeconomic data, inflation outlook, and risk environment.
Outlook for inflation and economic growth
During the meeting, the Council discussed the NBH's latest quarterly Inflation Report and projected a continued decline in headline consumer price index (CPI) and core inflation in the coming months. They estimated that CPI would be around 6.0 percent at the end of 2023, in line with the regional average. The NBH also provided forecasts for average annual inflation for the years 2023, 2024, and 2025.
Economic recovery and external balances
Deputy bank governor Barnabás Virág highlighted the gradual pickup in Hungary's economy, noting that the technical recession ended in Q3 and that progress continued in Q4. Furthermore, Virág mentioned the "rapid and significant" improvement in Hungary's external balances. He attributed this improvement to improved international investors' risk appetite and an agreement on the release of EU funding for Hungary.
Factors impacting inflation forecast
The Council considered various risk scenarios that could affect the inflation forecast. These included a slowing global recovery, a withdrawal of capital from emerging markets, and a slower recovery of domestic consumption. Virág noted that measures of sentiment are indicating an improvement in confidence.
The Hungarian central bank's decision to cut the base rate by 75 basis points reflects its cautious approach to monetary policy in light of global disinflation risks and volatility in investor sentiment. The Council emphasized the importance of data-driven decision-making and projected a decline in inflation in the coming months. The NBH also provided forecasts for inflation and the budget deficit in the coming years. Overall, the bank highlighted positive economic indicators, including the gradual recovery of the economy and improved external balances.
Questions & Answers
What was the base rate cut by the Hungarian central bank in Budapest? The Hungarian central bank (NBH) rate-setters cut the base rate by 75 basis points, to 10.75 percent, at a regular policy meeting in Budapest.
Why did the Hungarian central bank decide to lower the interest rates? The bank's Monetary Council decided to lower the interest rates due to risks surrounding global disinflation and volatility in international investor sentiment. They believed a careful approach to monetary policy was warranted.
What are the new interest rates in Budapest? In tandem with the base rate cut, the NBH also decided to lower the symmetric interest rate corridor. This brought the overnight (O/N) deposit rate to 9.75 percent and the O/N collateralised loan rate to 11.75 percent.
What factors did the Hungarian central bank consider in making their decision? The Council considered incoming macroeconomic data, the outlook for inflation, and developments in the risk environment. They also discussed the NBH's latest quarterly Inflation Report, which projected a continued decline in headline CPI and core inflation in the coming months.
What are the forecasts for inflation and the budget deficit in Hungary? The NBH forecasts average annual inflation of 17.6-17.7 percent for 2023, 4.0-5.5 percent in 2024, and 2.5-3.5 percent in 2025. The Council projects the budget deficit to be between 5.2 percent and 6.0 percent of GDP in 2023. They also anticipate the state debt ratio to drop to "around 73 percent" of GDP by year-end.
What were the risk scenarios discussed by the Hungarian central bank? The Council weighed several risk scenarios affecting the inflation forecast, including a slowing global recovery, a withdrawal of capital from emerging markets, and a slower recovery of domestic consumption. They also noted an improvement in confidence based on measures of sentiment.
What did the deputy bank governor say about the Hungarian economy? Deputy bank governor Barnabás Virág said that the technical recession had ended in Q3 and the gradual pickup in the economy had continued in Q4. He also mentioned a "rapid and significant" improvement in Hungary's external balances, as well as improved risk assessment and external financing capacity due to an agreement on the release of some of Hungary's EU funding.
Why does disinflation need to continue in 2024 according to the Hungarian central bank? The Hungarian central bank believes that disinflation needs to continue in 2024 to achieve price stability. They also mentioned that positive real interest rates would support disinflation.
What is holding back corporate investments in Hungary? According to Barnabás Virág, corporate investments in Hungary are being held back not by a lack of resources but by a lack of demand. He mentioned that non-financial companies have more than 21,600 billion forints (EUR 56.8bn) in liquid assets, which is equivalent to over 30 percent of GDP.
How can an improvement in the risk environment impact monetary policy? Barnabás Virág mentioned that a sustained improvement in the risk environment could increase the room for maneuver of monetary policy.