In the coming months, a gradual slowdown followed by an increasingly faster decline in the consumer price index is expected; achieving single-digit inflation by the end of the year will be a great achievement in economic history—Barnabás Virág, Deputy Governor of the National Bank of Hungary said on Tuesday during an online background discussion following the Monetary Council’s interest rate decision.

He emphasised that according to the bank’s data, inflation peaked in January and then started to slowly decline. According to the forecast, slow disinflation is expected in March, followed by a strong disinflationary trend, with a good chance of reaching single-digit inflation by the end of the year. He added that a patient approach to the base interest rate is still warranted. Accordingly, the Monetary Council left the interest rates unchanged and made a unanimous decision.

Virág also stated that it is still necessary to maintain the benchmark interest rate of 18 per cent for overnight deposit tenders. As planned earlier, the mandatory reserve ratio for banks will increase to ten per cent with daily compliance from 1 April, further tightening the impact of mandatory reserve assets on liquidity.

Energy prices have significantly decreased, so the euro selling tool linked to energy imports will be available until 31 March.

He pointed out that the capital and liquidity position of the Hungarian banking system is stable,

according to the central bank’s assessment. The current account deficit could be halved this year, and the improvement has already started. The external financing capacity will become positive by the end of the forecast horizon.

He explained that breaking the high inflation can be achieved through disciplined and coordinated measures. According to their data, it took 2–2.5 years in the past to break high inflation, similar to the current one, which was over 20 per cent. He believes that there are positive signs, with a narrower room for price adjustments, decreasing price expectations, and a moderation in domestic demand.

The Deputy Governor pointed out that high inflation reduces domestic demand and slows down economic growth. Meanwhile, the labour market is stable, labour demand is strong, and supply has also increased. He also spoke about how global investor sentiment has deteriorated due to the impact of financial market turbulence. Concerns were dominant that the ripple effects of American bank failures could be felt. However, domestic banks perform exceptionally well in meeting regulatory requirements, their capital and liquidity positions are strong.

Barnabás Virág confirmed that the Central Bank is closely monitoring the effects of increased uncertainty in the international money markets on the risk environment. They continuously evaluate incoming data and inflation outlooks and are ready to take appropriate steps in case of increasing risks. In response to a question, he stated that the two new Monetary Council members are prepared, knowledgeable experts who will greatly contribute to the work and responsible decisions of the National Bank of Hungary.

Monetary Council: Return to Inflation Tolerance Range Expected in 2024

With its decision on Tuesday, the Monetary Council kept the base rate at 13.0 per cent and did not modify the two sides of the interest rate corridor. In its reasoning for the decision, the Council emphasised that the primary goal of the National Bank of Hungary (MNB) is to achieve and maintain price stability.

In its statement, the Council pointed out that since the February rate-setting meeting, global risks have intensified, and with it the risk assessment of emerging market instruments has deteriorated, concerns about certain players in the global banking system have led to strong volatility in the markets. The MNB closely monitors the extent and durability of changes in the risk environment, they wrote. Inflation peaked in January, and in the coming months, a ‘slower, then increasingly rapid decline in the consumer price index is expected,’ with a return to the central bank’s tolerance range expected in 2024.

According to the main indicators of the MNB’s March Inflation Report released on Tuesday, consumer prices are expected to rise by an annual average of 15.0-19.5 per cent this year, 3.0-5.0 per cent in 2024, and 2.5-3.5 per cent in 2025. In the December forecast, similar rates of inflation were expected for 2023, but for 2024, they predicted a smaller increase of 2.3-4.5 per cent. The 2025 inflation expectation of 2.5-3.5 per cent has remained unchanged. The Monetary Council emphasised that the strict monetary conditions are exerting their deflationary effect.

Energy and raw material prices, as well as transportation costs, have significantly decreased,

tensions in value chains have eased, and the slowdown in global economic activity continues to curb external inflation. The decrease in domestic demand narrows the pricing margin for companies, while the active actions of the Competition Authority also contribute to a more disciplined pricing behaviour. Inflation expectations, however, remain at consistently high levels, while corporate price expectations for retail sales and services have been below their peak levels from last summer for months.

Regarding growth, the statement noted that internal factors such as moderate growth in consumption and the postponement and rescheduling of investments are slowing down the economy. In the second half of the year, growth is expected to pick up with a decrease in inflation and an increase in investments, while both internal and external factors can positively contribute to next year’s growth.

The central bank lowered its GDP forecast for this year from the expected 0.5-1.5 per cent in the December Inflation Report to 0.0-1.5 per cent. It did not change its 2024 and 2025 forecasts: growth could be 3.5-4.5 per cent next year and 3.0-4.0 per cent by 2025. The bank reported that the current account deficit could be halved in 2023 and the financing capacity could become positive again by the end of 2025.

The statement noted that the National Bank of Hungary strengthened the monetary transmission with its tools introduced in the autumn aimed at the sustained commitment of interbank liquidity, including the transformed reserve requirement system, the one-week discount bond, and the long-term deposit tender, and will continue to apply these tools in the future to achieve the goal of price stability.

In order to ensure financial stability, the central bank will continue to use overnight deposit quick tenders and foreign exchange swap transactions. In addition, the central bank will use the euro liquidity-providing swap tool and the Central Bank discount bond to promote market stability at the end of the quarter.

The statement also said that the National Bank of Hungary continuously evaluates incoming data and the development of inflation expectations and is prepared to take appropriate action in the event of increased risks. They emphasised that the central bank continues to take into account sustained changes in risk assessment when adjusting the conditions of the one-day tools introduced in mid-October.

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