Another 25-Basis Point Hungarian Central Bank Rate Cut

March 29, 2010

The Mayar Nemzeti Bank implemented its fourth straight 25-bp interest rate cut to 5.5% and reiterated the assertion that further cuts will be possible only if financial market risk perceptions allow such.  Weak growth and the forecast of sub-target inflation next year are not sufficient conditions.  Currency behavior is a litmus test for risk perceptions, and the forint continues to recoup ground and is more than 11% stronger against the dollar than a year ago.  Statements from the central bank have been identifying proper perceptions of risk as a critical condition for cutting rates since early autumn, and the bank reduced the incremental size of cuts to 25 bps in December from 50 bps, the size of earlier reductions in August, September, October and November.  A six-month hiatus from easing ended last July with a 100-basis point reduction.  Early in the Great Recession when many G-7 central banks were cutting rates, Hungary’s had to hike them in October 2008 by 300 bps to 11.5%, but reductions commenced shortly afterward with four moves of 50 bps each in November 2008, December 9th and 23rd,  and January 2009.  Thus, the base rate is now 600 basis points lower than its late October 2008 peak and 400 bps below its mid-2009 level.

Hungary’s recovery has lagged behind others in eastern Europe.  GDP dropped 1.7% annualized last quarter and by 4.0% from 4Q08.  Higher taxes and administered prices have elevated CPI inflation, which was at 5.7% in February but should now trend downward.  Hungary runs a current account deficit of somewhat more than 2.0% of GDP but has a somewhat contained sub-5% of GDP budget imbalance.  Although consumer spending continues to be lackluster, an export-led GDP recovery is at hand.  Today’s rate cut of 25 basis points met analyst expectations and was just half as large as one reported earlier in the day by Romania.

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



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