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No Base Rate Action Before September

The Monetary Council of the National Bank of Hungary (MNB) once again left the base rate unchanged at its latest rate setting meeting, and, albeit expected by many, the European Central Bank also kept the interest rate on hold last week.

In a decision that met the expectations of various analysts, the Monetary Council decided to remain on the sidelines at its latest rate-setting meeting on July 23. The 0.9% key rate has now been kept on hold since the spring of 2016, when it ended it lengthy easing cycle.  

The Monetary Council also left the overnight deposit rate unchanged at -0.05%. This was also kept on hold at the previous policy meeting.

In an important move, the council’s rate setters dud raise the overnight deposit rate by 10 basis points, which marked the first policy tightening in years.

In a statement released after the meeting, the council said macroeconomic data released since the previous policy meeting confirmed the baseline projections in the MNB’s latest quarterly “Inflation Report”, which was released a month earlier.

“Incoming data confirms the baseline projection in the June Inflation Report,” the council said, explaining that the pace of price growth had started to slow in the summer months as the MNB’s measure of core inflation excluding indirect tax effects, a bellwether indicator of underlying inflation, fell to 3.5% in June.  

Core Inflation

The council reiterated that core inflation excluding indirect tax effects is likely to decline gradually to 3% from the end of 2019. Incoming data also suggests that the dynamics of GDP growth is likely to slow gradually from the second quarter, in line with expectations, the council said.

It relies “mainly” on the projections in the “Inflation Report” when taking monetary policy decisions. The council repeated that it “applies a cautious approach” to monetary policy decisions, and that future developments in the outlook for inflation would be “a decisive factor in the necessity of further measures”.

Any changes in the monetary policy can now be expected no sooner than in September, analysts say, adding that so far, international economic developments have helped the Monetary Council to stick with its loose policy.  

Just recently, the European Central Bank has hinted it could cut interest rates to tackle a slowdown in the eurozone economy; although its governing council left the rate unchanged at the latest meeting, it did hint at cutting rates in September in a bid to support the trading bloc’s ailing economy. The ECB also said it saw rates at current or lower levels until mid-2020, but is also considering other measures to support the eurozone, including resuming quantitative easing.

In the meantime, Hungary’s labor market has reached a point where the unemployment rate cannot significantly fall further and employment can only be slightly expanded. According to data released by the Central Statistical Office (KSH), Hungary’s three-month rolling average unemployment rate reached 3.3% in April-June 2019, edging down from 3.4% in the previous three-month period, and down from 3.6% 12 months earlier.  

In absolute terms, there were 155,500 unemployed Hungarians aged 15-74, down 9,700 from April-June 2018.

The unemployment rate among men aged 15–74 was 3.4%, while the jobless rate among women was 3.2%. Broken down by age group, the unemployment rate in the 15-24 age group stood at 10.8%, up 1.3 percentage points compared to the base period. This age group accounts for more than one-fifth of all jobless. The unemployment rate in the 25–54 age group, i.e. persons belonging to the “best working age”, decreased by 0.5 of a percentage point to 2.9%, while the rate among people aged 55–74 increased by 0.3 of a percentage point to 2.5%.

Working Women

According to ING Bank analyst Péter Virovácz, that the jobless rate and the number of unemployed is again at a new low is mainly due to improving employment among women. In the second half of the year he said the jobless rate could be around 3.4% and he does not expect it to fall significantly lower, state news agency MTI quoted him as saying.

Employment figures have also been released by the KSH and they show that the number of employed people in Hungary stood at 4,510,900 among those aged 15-74 in April-June 2019, some 36,300 or 0.8% more than in the corresponding period a year earlier.

The number of those employed on the domestic primary labor market rose 2% from a year earlier to 4,285,000, while the number of those in fostered work programs dropped 34.9% to 108,700. The number of those working abroad was up 9.4% at 117,200. The rate of employment among Hungarians aged 15–64 grew by 0.7 of a percentage point to 70%. The employment rate for men aged 15–64 was 77.1%, while among women it was 63%.

The rate of employed young people aged 15–24 years was 28.2%. In the “best working age” group of 25–54 years, the employment rate was 84.6%, while in the older, 55–64 age group, the employment rate grew by 2.6 percentage points to 56.1%.

Although the labor market is close to reaching its full potential, András Horváth of TakarékBank told MTI that around 250,000-300,000 jobs could still be filled until the economy reaches full employment, but the remaining labor pool consists of unskilled workers or those who are difficult to employ and some form of policy intervention would be needed to get them to work.

Numbers to Watch in the Coming Weeks

The last month of the summer will finally bring some excitement in terms of macroeconomic indicators. First, industrial output figures for June will be published on August 7, in a first estimate, followed by the detailed second estimates on August 13. The consumer price index for July will be out on August 8, and we’ll find out about the expansion of the Hungarian economy in the second quarter of 2019 on August 14.