Hungarian Central Bank Base Rate Left at 5.25%

September 27, 2010

Hungary’s base rate has been at 5.25% since a 25-basis point cut in April.  Such had been the tenth consecutive monthly reduction and fifth drop in a row of 25 basis points in size.  Earlier rate history included a 300-basis point jump in October, followed by a 50-bp cut in November, two cuts of 50 bps each in December 2008, and a fourth reduction of 50 basis points in January 2009.  Policy was paused for the next six months as it has been since April 2010.  Rate reductions thus total 425 bps since July 2008 and 625 bps since November 2008.

Hungarian rates have probably bottomed.  Today’s statement from Magyar Nemzeti Bank officials mentions contingencies that might compel them to raise rates eventually but does not talk about the likelihood of another rate cut.  Those contingencies — a weaker forint and cost-side pressures spilling into consumer prices and the risk of rising expected inflation — have not occurred yet, nor are they likely to occur very soon.  In fact, inflation is trending lower, having fallen from 5.9% in March to 4.0% in July and 3.7% in August.  Hungary’s recession is over, but it take quite a while for actual activity to climb back to the level of potential GDP.  Real GDP last quarter was just 1% greater than in 2Q09 and showed scant underlying strength relative to 1Q10 because of continuing very weak domestic demand.  Officials are anticipating a further drop of inflation to the 3% objective within the horizon of their forecasting period.  Hungary’s current account is running close to balance, while the budget has a deficit equal to about 4% of GDP.  Officials might like to cut the base rate further but have to be very careful in light of investor concern about the sovereign debt problems of certain members of the euro area like Greece and Portugal and Euroland aspirants like Hungary.

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



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