Another 25-Basis Point Hungarian Central Bank Rate Reduction

April 26, 2010

The Magyar Nemzeti Bank implemented the 14th cut of its base rate since November 2008 and tenth since July 2009.  The decrease of 25 basis points to 5.25%matched expectations and was the fifth consecutive monthly drop of that size.  Hungarian CPI inflation has been rising with an on-year increase in March of 5.9% after 5.7% in February and 2.9% in March 2009, but the country ranks among the weakest of Eastern Europe in terms of activity.  Real GDP fell 1.7% annualized in the final quarter of 2009 and by 4.0% compared to 4Q08, and calendar 2010 growth is likely to be negative.  Unemployment is at 11.4%.    A statement from the central bank today projects stagnant domestic demand this year, a cresting of inflation by the middle of this year and sub-target readings next year.  The medium-term price target is 3%.  Officials are proceeding with monetary easing in cautious 25-bp increments because of the vulnerability of Hungary’s financial markets in this contagion-prone era.  Hungary’s budget deficit-to-GDP and debt:GDP ratios last year were 4.0% and 78.3%.  The current account in 2010 is likely to run a deficit of marginally more than 2% of GDP, but the forint, like many East European and Asia currencies, has performed well and shows an on-year gain against the dollar of roughly 15-3/4%. If the forint remains firm, the base rate can probably be reduced further.  After a 300-bp draconian increase on October 22, 2008 to 11.5%, the base rate was cut by 50 bps in the following month, twice in December 2008 by 50 bps each, and once more by 50 bps in January 2009.  Then there was a half-year pause in monetary easing broken finally by a 100-basis point reduction in July 2009 and cuts of 50 bps each in August-through-November.

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



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