Hungary's Central Bank should cut Interest Rate

Hungary's central bank should cut its benchmark interest this month to stem the forint's strengthening and bolster economic growth, said Lajos Bokros, a former finance minister who managed spending cuts a decade ago, cited by Bloomberg.

„With a small, 25 basis-point interest rate cut, the central bank can send exactly the message to the markets that the government has no interest in further forint strengthening,” he said in an interview with Info Radio late yesterday evening. Hungarian monetary policy makers have kept interest rates at 8%, the European Union's highest, since October as inflation accelerated to the fastest pace in almost six years.

The central bank last month cut the inflation outlook for its 18-month policy horizon as the forint strengthened. The currency has gained 2.3% in the past month, the world's third-best performance behind the Thai baht and the Slovak koruna, reaching an 18-month high earlier this week. A stronger forint helps quell inflation by cutting the price of imported products such as crude oil and cars.

Still, the currency's strength puts Hungarian exporters at a disadvantage, cutting the value of the revenue they collect in other currencies. That risk outweighs the advantage of slower inflation when economic growth is set to slow because government austerity measures sap consumer demand. „If the message of Hungarian economic policy is that we are not interested in an overly strong forint, because that doesn't help growth and exports, because although it would lower inflation on the short term we want to concentrate to long-term processes, then” a rate cut „would definitely be welcome,” Bokros said.

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