A 100-Basis Point Rate Cut in Hungary

July 27, 2009

Magyar Nemzeti Bank implemented a rate cut as expected for the first time since January 19th, but its magnitude was twice as much as anticipated.  The 8.5% central bank base rate is now back to its level before a 300-basis point hike last October 22nd, which had been taken in response to a sharply depreciated forint and a related boost in import price and overall consumer price inflation.  While on-year inflation of 3.7% still lies above the 3.0% medium-term target, a statement released by monetary officials projects eventual sub-target inflation and leaves open the door to subsequent reductions in Hungary’s central bank rates.  From a peak of 11.5%, officials earlier cut its rates by 50 basis points each last November 20, December 8, December 22nd and January 19th.  Hungary is suffering through a severe recession.  Real GDP contracted by 9.6% at a seasonally adjusted annual rate in the first quarter (down 6.7% on year), and industrial output is 22.1% lower than a year ago.  Hungary has twin deficits amounting to 2.9% of GDP on the current account and nearly 4% of GDP on the budget.  The forint had recovered 16% against the euro since March but fell after today’s bigger-than-expected easing.

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


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