Hungary Cuts Interest Rates

Hungary Cuts Interest Rates

The National Bank of Hungary's monetary policy council Monday cut the base rate on two-week bills for commercial banks to 6.5% from 7%, in line with analysts' expectations.

The central bank, at the same time, raised the difference between its policy rate and the overnight deposit rate to one percentage point from half a percentage point. This is the fifth month in a row that Hungary has lowered its base rate by half a point. The last time Hungary's base rate was this low was in June 2006.

The monetary policy council is tipped by analysts to have been divided about Monday's decision, with some members probably wanting an even bigger rate cut.

"After October's tight decision, the MPC was probably sharply divided again but the recent swings of the forint justifies its caution," said Budapest Alapkezelo fund manager Danel Bebesy.

"Inflation isn't an obstacle any more to further easing, but financial stability continues to be a critical consideration," Mr. Bebesy said.

The vast majority of economists --17 of the 19 private bank economists polled by Dow Jones Newswires prior to the decision--had expected the central bank to reduce the base rate by half a percentage point. They cited positive investor sentiment, a relatively strong and stable forint, a slump in domestic demand, and the prospect of undershooting next year the central bank's 3% inflation target.

The move is also seen driving a recovery in gross domestic product, which the government expects to fall by 6.7% this year, the steepest fall since Hungary's switch to a market economy. The central bank will publish the minutes of Monday's monetary policy council meeting Dec. 9.

Analysts expect Hungary to continue its easing cycle and cut rates by another 50 basis points in December.

"In Hungary, the central bank forecasts the undershooting of the inflation target in the second half of 2010 and in 2011, which supports further interest rate cuts in 2010; an extension of the easing cycle into 2011 cannot be ruled out either," said ING Bank economist Agata Urbanska in a note.

"All in all, inflation is likely to be seen well below the 3% target over the coming two years, and indeed it could hover around 1.5% in late 2010 in the new forecast. The rationale of the central bank's easing stance with such a forecast would be very obvious," Morgan Stanley said.

The central bank's medium-term inflation target is 3%. Inflation was an annual 4.7% in October and the central bank has said it expects to undershoot the 3% target in the second half of next year.

Due to its large external debt and loose fiscal policy in the past, Hungary was hit hard by the global financial market crisis, making it the first EU country to secure financial aid from the International Monetary Fund last year.

Source: WSJ

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