Another Interest Rate Cut in Hungary

November 27, 2012

Officials at Magyar Nemzeti Bank sliced their Bank Rate by 25 basis points for a fourth consecutive month.  The action, which leaves the rate level at 6.0%, had been widely anticipated, and officials left open the door to more rate reductions if economic trends develop as they expect.

Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level. The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment continues and the medium-term outlook for inflation remains consistent with the 3 per cent target.

Not only is Hungarian GDP well below its potential level at present, but officials anticipate weak demand to continue next year and in 2014.  For inflation to fall to the 3% medium-term target as projected, however, it’s also necessary that wage awards not exceed productivity growth.  Officials are meanwhile counting upon better export demand to end the current recession.

The first of the four recent easings of monetary policy announced on August 28 was also the first reduction since April 2010.  In between, rate hikes had been implemented of 25 bps in November 2010, December 2010, and January 2011 followed by increases of 50 bps in November and December of 2011.  Those moves totaled 175 bps from a prior cyclical low of 5.25%.

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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