MNB lifts inflation forecast for 2020, lowers GDP growth estimate

Image by Jessica Fejos

MNB raised its forecasts for inflation for this year to 3.2-3.3% compared to the previous estimate of 2.6-2.8% in its earlier Inflation Report published in the spring.

The inflation forecasts for 2021 was lowered to 3.2-3.3% from the earlier estimate of 3.4-3.5%. For 2022, MNB expects inflation to slow to 3%, in line with its previous estimate given in March.

MNB explained that the forecast is in a range because of the coronavirus pandemic there is significant uncertainty surrounding the economyʼs performance and the situation on the ground could change day by day.

In a separate statement Tuesday afternoon MNBʼs Monetary Council said that due to the coronavirus epidemic, strong disinflationary effects have appeared in the Hungarian economy. Following a temporary rise at the beginning of 2020, CPI quickly returned into the central bankʼs tolerance band before declining to its lower bound. 

Looking ahead, high volatility in inflation is expected to persist. Inflation is likely to stabilize again around the 3% target as the effects of cost-sensitive items fade. Weakening economic activity caused by the pandemic reduces core inflation excluding indirect tax effects through several channels. In addition to a weaker external inflation environment, more muted domestic demand compared to previous years is also increasingly restraining underlying inflation. 

Due to strong disinflationary effects, core inflation excluding indirect tax effects will fall below 3%. It is expected to stand at 3.3–3.5% in 2020 and at 2.6–2.7% in 2021.

In its preliminary release of the Inflation Report, the central bank lowered its forecast for economic growth for this year significantly. MNB expects GDP to keep growing but by only 0.3-2% compared to an earlier estimate of 2-3%.

Economic growth in 2021 could be between 3.8-5.1% instead of the 4-4.8% predicted earlier.

In 2022 economic growth is seen to be around 3.5-3.7% compared to the earlier 3.5% estimate.

A fan chart published on Tuesday indicates MNB expects CPI to be above the 3% mid-term target for the foreseeable future. CPI is again seen nearing the 3% target by early 2022. 

The central bank puts the inflation target in a +/-1% tolerance band.

The fan chart shows that under extreme circumstances inflation could fluctuate between 6% and 0% in 2022.

Finance Minister Mihály Varga earlier in June said the ministry expects the economy to contract about 3% this year.

MNB stresses importance of investments

MNB had to make decisions for the economy to take the expected jumpstart from Q3, MNB governor György Matolcsy said at an online press conference on Tuesday afternoon.

After 2.2% growth in Q1 the Hungarian economy could have contracted by 7% year-on-year in Q2 according to preliminary MNB estimates, Matolcsy said explaining a base rate cut. 

The aim is to make the business environment even more supportive, Matolcsy said. Also, MNB intended to signal it sees the base rate important and that it has room for maneuver, he added.

Among the bankʼs main goals, price stability and the stability of the financial system have been preserved, and the third is to support the governmentʼs economic policy, he noted.

Investments are crucial for growth to start in Q3, so it is essential to keep the Hungarian investment rate at 28-29% level it reached in the past years, said deputy governor Mihály Patai.

MNB is in the process of rethinking its two programs contributing to investment growth to make even more effective, he said.

The national bank recently amended both programs to improve access to fight the economic effects of the pandemic. They decided to outlay more than HUF 100 billion in the FGS Go! program, refinancing capped-rate low-interest loans to businesses and expect a dozen companies to issue bonds in excess of HUF 200 bln combined in Q3 under the bankʼs corporate bond program.