A Modest Tapering of the Downtrend in Hungary’s Central Bank Interest Rate

August 27, 2013

The Monetary Council at Magyar Nemzeti Bank decided to cut the two-week deposit rate by 20 basis points to 3.8%.  Twelve consecutive monthly 25-basis point reductions had preceded this action.

Incoming data on inflation and the real economy give scope to ease monetary conditions further. However, in light of the significant reduction in interest rates so far and taking into account developments in perceptions of the risks associated with the Hungarian economy, a slower pace of policy easing is warranted.

CPI inflation (1.8% in the year to July) has been running below the central bank’s target of 3.0% and in the vicinity of a four-decade low.  “Weak demand has exerted a strong disinflationary impact, and, as a result, companies have limited ability to pass on higher production costs into prices.”  Although Hungary’s recession ended last quarter, recovery is tepid, and the central bank wants to lend support to growth.  The extent of such support will be limited by fear that easing in the face of Fed tapering could subject the forint to intensifying selling pressure.  The forint is trading near a four-month low against the euro.  Hence, a diminished pace of interest rate declines was adopted, but in fact, some analysts were looking for a smaller-than-20bp rate cut this month.

Higher volatility in sentiment in global financial markets continues to pose a risk, which in turn calls for maintaining a cautious approach to policy.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.

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