MNB Lowers Central Bank Base Rate by 75 Basis Points

At its meeting this Tuesday, the Monetary Council of the National Bank of Hungary (MNB) reviewed the latest economic and financial developments and decided to lower the central bank base rate, with effect from November 22, 2023 by 75 basis points from 12.25% to 11.50%. By the evening, the Hungarian currency, the forint (HUF) weakened against the major foreign currencies.

In a statement released, the the Monetary Council says MNB's primary objective is to achieve and maintain price stability. Without prejudice to its primary objective, the Magyar Nemzeti Bank preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.

Heightened geopolitical tensions are posing increased risks to the outlook for the global economy in general. In 2023 Q3, economic growth slowed in the EU and China, while it accelerated in the US. However, the short-term economic outlook is exposed to downside risks. The persistently high inflationary environment and the ongoing Russia-Ukraine war have been a source of significant uncertainty to the outlook for economic activity globally, and particularly in Europe. In the meantime, the escalation of the situation in Gaza has contributed to the increase in geopolitical tensions.

Global trends point to continued disinflation. Weakening global economic demand, lower commodity prices compared to the previous year and the correction in international freight costs suggest a continued decline in inflation rates. However, volatility in commodity prices has persisted, continuing to pose a risk to inflation. Core inflation indicators, falling at a slower pace, suggest that achieving price stability again is expected to be a protracted process in general.

International risk appetite has been volatile since the September policy decision. Sentiment in global financial markets was significantly influenced by expectations for the monetary policies of the world’s leading central banks and incoming macroeconomic data. In addition, continuing geopolitical tensions raised uncertainty. Based on market expectations, the Federal Reserve’s and the European Central Bank’s interest rates may have peaked; however, monetary conditions will remain tight for a prolonged period, according to communication from both central banks. Central banks in the CEE region left their policy rates unchanged in the month.

In 2023 Q3, Hungary’s GDP declined by 0.4% in annual terms, but rose by 0.9% compared to the previous quarter, indicating that the recession has ended. Based on preliminary data, the main contributor to the downturn in domestic economic performance has been the decline in industrial output and market services, while agricultural performance has moderated the decline. The household confidence indicator improved slightly in October. In September, industrial production, construction output and retail sales fell in annual terms. By contrast, vehicle production, accounting for the largest share of industrial production, increased. The labour market remains tight, and the unemployment rate is low.

In 2023, subdued economic performance has mainly reflected high inflation and declining government investment. Cautious consumer and investment decisions have led to a decline in domestic demand. However, this year’s economic performance is expected to be improved significantly by the correction in agricultural production after last year’s drought. The real wage index, increasing since September, is also expected to contribute to a slow pick-up in performance towards the end of the year. Net exports are expected to make a positive contribution to economic growth in 2023. Declining inflation and the recovery in domestic demand components are likely to support GDP growth in 2024 and 2025. With the pick-up in the production of new export capacities built recently, Hungary’s export market share is expected to increase further. In our projection, in 2023, Hungary’s economic performance is expected to be in the lower half of the range provided in the September Inflation Report. In 2024 and 2025, Hungary’s GDP is expected to expand by 3.0–4.0%.