Hungary’s Policy Interest Rate Reduced Less Than Expected

December 21, 2009

The Magyar Nemzeti Bank cut its policy rate by 25 basis points, not 50 bps as forecast, and released a statement that did not attribute the smaller move to higher on-year inflation of 5.2% in November after 4.7% in October but rather to market perceptions of fiscal risk and the forint’s associated vulnerability.  The rise of inflation resulted from temporary food and energy pressures, and officials expect their 3% inflation target to be undershot “significantly” over the coming year to year and a half.  Hungary’s economy is still contracting, having fallen at a 7.1% annualized rate in 3Q09 and by 8% from a year before.  With some of Eastern Europe’s higher interest rates, consumption and investment are both weak, and better export demand isn’t expected to produce a GDP recovery until mid-2010.  From a peak of 9.5%, the central bank was cut by 100 basis points in July, 50 bps each in August, September, October and November, and now 25 bps to a 42-month low of 6.25%.  More reductions seem probable, but officials are unwilling to take undue risks with the forint and according are proceeding cautiously.

Copyright Larry Greenberg 2009.  All rights reserved.  No secondary distribution without express permission.

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