First Hungarian Central Bank Rate Cut since April 2010

August 28, 2012

Hungary’s base rate was cut by officials at the Magyar Nemzeti Bank to 6.75% from 7.0%, breaking a string of 5 rate hikes in November and December 2010 and January, November and December 2011.  Officials had recently signaled a bias to ease contingent on a substantial and enduring reduction of Hungary’s risk premium and improved inflation prospects.  Today’s statement from the central bank, however, has a guarded tone on the matter of inflation.

CPI inflation in June and July was higher than previously expected, as a result of higher unprocessed food prices and the increase in excise duties.  Although the risk of second-round effects is low due to persistently weak demand and slack in the labor market, meeting the inflation target is expected to be delayed.

A rate reduction was nonetheless implemented because Hungary is now in technical recession and due to continuing downside risks posed by the European debt crisis.  The door was left open to the possibility of additional ease.  “Monetary policy can only be eased to the extent that supply shocks to the economy and the upward impact on prices of the Government’s measures do not lead to the build-up of second-round inflationary effects and perceptions about the Hungarian economy continue to improve.”

Copyright 2012, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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