Monetary Council Reduces Base Rate

At its meeting on June 23, 2020, the Monetary Council of the National Bank of Hungary (MNB) reviewed the latest economic and financial developments and lowered the central bank prime interest rate by 15 basis points to 0.75% with effect from June 24, 2020.

In a press release, MNB says that its mandate in the the current extraordinary economic environment, is still to achieve and maintain price stability, to preserve financial stability, as well as to support the government’s economic policy. "Based on incoming data, Hungarian economic performance in 2020 is likely to be more subdued than earlier expected, while the outlook for inflation has shifted downwards persistently. To maintain price stability and support the recovery of economic growth, fine-tuning of monetary conditions has become necessary," it points out.

According to the central bank's explanation, the coronavirus pandemic hit the global economy in a weakened state. As a result of the measures taken to prevent the spread of the pandemic, in the second quarter real economic activity declined, while unemployment rates rose worldwide. From the beginning of May, economic activity has restarted gradually as the restrictive measures were eased. There remains an exceptionally large degree of uncertainty in judging the time profile of the health emergency and the speed of the global economic recovery.

Due to the coronavirus pandemic, the outlook for growth in the global economy has deteriorated significantly. Disinflationary effects have strengthened generally. In parallel, the global leading central banks announced further easing measures. The Federal Reserve continued its liquidity-providing and asset purchase programs. The European Central Bank raised the total amount of its asset purchase program (PEPP), launched to counteract the effects of the pandemic, to EUR 1,350 billion and extended its horizon. In our region, the decision-makers at the Czech and the Polish central banks cut the policy rates to close to zero as well. In parallel with the restart of economic activity and the easing measures taken by the global leading central banks, financial market sentiment started to improve.

As for the economic outlook in Hungary, the Monetary Council is of the view that " this year’s macroeconomic data are expected to show significant volatility and dichotomy. The effects of the pandemic are likely to be the strongest in the second quarter. Following a significant decline in GDP in the spring, a recovery of economic growth is expected from the third quarter. A pick-up in public investment and an expansion in corporate lending are required to a quick ʻVʼ shape economic recovery in the second half of the year. The moratorium on instalment payments of loans contributes HUF 2,000 billion to maintaining purchasing power and preserving jobs by the end of the year overall. In line with the expected slower recovery in the external environment, production in export-oriented industrial sectors may pick up towards the end of the year. Overall, Hungarian GDP may grow at a restrained pace in 2020. Economic growth is expected to be 0.3–2.0 percent in 2020, 3.8–5.1% in 2021 and 3.5–3.7% in 2022.