Monetary Council Cuts Key ECB Interest Rate to 7.25%.

At its meeting on May 21, 2024, the Monetary Council of the National Bank of Hungary (MNB) reviewed the latest economic and financial developments and decided to cut central bank interest rate by 50 basis points to 7.25%.

The MNB says in a press statement that its primary objective is to achieve and maintain price stability. Without prejudice to its primary objective, the National Bank of Hungary preserves financial stability and supports the Government’s economic policy, as well as its policy on environmental sustainability.

In Europe, risks to the short-term outlook for economic growth are skewed mainly to the downside; however, confidence indicators improved in 2024 Q1. Despite the slight slowdown in the first quarter, the US economy continues to grow steadily; however, employment growth moderated in April. The Chinese economy expanded at a rate above expectations in 2024 Q1, primarily reflecting the effects of economic policy measures aimed at stimulating demand.

Annual inflation in the euro area remained unchanged in April relative to the previous month, while consumer price increases slowed slightly in the US. In the global economy, services inflation has been generally higher compared to the levels seen before Covid-19, which restrains disinflation. In addition, geopolitical conflicts may increase volatility in the energy market and may cause disruptions in global value chains, leading to a renewed rise in freight costs. However, looking-ahead, subdued global economic demand points to moderate inflation rates. Oil prices have been falling and gas prices have been fluctuating in the range of around EUR 30 in the period since the Council’s previous interest rate decision.

International risk appetite has increased since the April policy decision. Based on market pricing, the Federal Reserve may start cutting interest rates later than the European Central Bank. The expected divergence between monetary policies of two of the world’s leading central banks may lead to increased volatility in emerging markets through the global interest rate environment. In the CEE region, the Czech central bank lowered its policy rate by 50 basis points to 5.25% in May, while the Polish and the Romanian central banks left monetary conditions unchanged.

In 2024 Q1, Hungarian economic growth picked up. Domestic economy grew by 1.1% in annual terms and by 0.8% on the previous quarter. Market services were the largest contributors to economic growth; however, the decline in value added in industry hampered economic performance. In March 2024, industrial production and construction output fell, while the volume of retail sales rose. As regards the main determinants of household consumption, the significant rise in real wages seen since September 2023 is expected to continue this year. The gradual improvement in the consumer confidence indicator reflects an easing of the precautionary motive. Labor market tightness has eased over the past months. With a high level of employment, the unemployment rate stood at 4.6% in 2024 Q1.

In 2024, the gradual expansion in Hungary’s GDP will be mainly supported by domestic demand components. Economic growth is likely to accelerate further in the second half of the year. Persistently weak European economic activity is holding back export performance, while significant capacity-enhancing foreign direct investment projects are gradually stimulating it. In 2024, GDP may grow by 2.0-3.0% based on the MNB’s projection. Balanced economic growth is expected from 2025, and Hungary’s export market share is likely to increase.