Hungarian Base Rate Held Steady at 5.25% as Expected

October 25, 2010

The Magyar Nemzeti Bank left its benchmark interest rate unchanged for a sixth consecutive monthly meeting citing the prolonged period of sub-trend economic activity and an uncertain inflation outlook.  On-year CPI inflation edged up a tenth to 3.8% last month but had eased 2.2 percentage points over the previous four months.  Domestic demand remains weak.  The economy nearly stalled in the second quarter, with GDP edging just 0.1% higher at an annualized rate and showing only a 1.0% advance from a year earlier.  Part of the uncertainty surrounding future inflation, which is projected at about 3.5% next year and in 2011, stems from a controversial set of proposed tax changes and the rest of a budget deficit-reduction plan.  Today’s statement does not mention the forint.  The need to protect the exchange rate made officials proceed carefully with easing since late 2009.

One of seven policymakers in September had voted for a 25-basis point rate cut.  The central bank last reduced its base rate by 25 basis points in five consecutive months through April 2010.  Four cuts of 50 basis points each were made in August through November 2009, and that was preceded by a full-percentage point reduction in July 2009.  When many other central banks began easing in October 2008, Hungary was forced to lift its benchmark rate by 300 basis points in order to comply with an IMF program.  That increase was followed by cuts of 50 bps in November 2008, two separate reductions of 50 bps each in December and a 50-bp cut in January 2009 before a six-month policy pause.  At 5.25%, the base rate is presently 625 basis points lower than its October 2008 peak.

Copyright Larry Greenberg 2010.  All rights reserved.  No secondary distribution without express permission.

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