Central Bank to Use All Tools to Support the Economy

In the current extraordinary economic circumstances, the Hungarian National Bank’s (MNB’s) mandate is still to achieve and maintain price stability, to preserve financial stability, as well as to support the government’s economic policy.

Consistent with this, mitigating the negative effects of the coronavirus pandemic on the real economy and financial markets and creating the conditions for restarting economic growth have become the MNB’s key priorities, according to a press statement released following the monetary council meeting of May 26.

In recent months, the MNB has responded to the emerging challenges by taking a series of coordinated measures, transforming and expanding its set of monetary policy instruments. These changes will allow the MNB to provide the required amount of liquidity to the major sub-markets and to set the appropriate monetary conditions in a targeted and flexible manner.

The coronavirus pandemic hit the global economy in a weakened state. Its negative economic effects appeared quickly in a wide range of countries. There remains an exceptionally large degree of uncertainty in judging the time profile of the health emergency and its macroeconomic consequences. In the first quarter, the economic performance of the US, China and the euro area declined substantially. Despite a significant slowdown, several economies in the Central and Eastern European region continued to grow on a year-on-year basis. A number of indicators showed an improvement in sentiment in global financial markets, while volatility has decreased in recent weeks. Risk appetite continued to be influenced by developments related to the pandemic and the growing tension between the US and China. Global oil prices rose in May.

The effects of the coronavirus pandemic were also reflected in macroeconomic data for Hungary. According to preliminary data, the Hungarian economy still grew by 2.2% year-on-year in the first quarter of 2020. It remains a goal to maintain 2-3%age point growth surpluses compared to the euro area. The surplus significantly exceeded this in the first quarter. Despite the adverse effects of the coronavirus, market services made the largest contribution to sustained economic growth. This year’s macroeconomic data will continue to show significant volatility and dichotomy. In the first half of 2020, growth is likely to slow significantly, reflecting the negative economic effects of the pandemic; then domestic growth, investment, the labour market, lending and foreign trade are expected to pick up again as the negative effects wane and economic activity lost temporarily is regained.

In line with expectations, the consumer price index fell below the central bank target in April, primarily reflecting a significant decline in fuel prices. Subsequently, inflation is expected to stabilise gradually at the 3% target. Inflation expectations remain anchored. Core inflation excluding indirect tax effects is likely to be around 3.2-3.5% on average in 2020, before decreasing gradually to 3%.