Sixth Straight Hungarian Central Bank Rate Cut

January 29, 2013

The two-week deposit rate of the Magyar Nemzeti Bank has been reduced by 25 basis points to a 34-month low of 5.5% that remains elevated compared to the level of rates elsewhere in Europe.  The rate has been cut by a total of 150 basis points since August, and this month’s reduction was authorized in spite of further depreciation of the Hungarian forint against the euro.  A statement from monetary officials anticipates lower inflation, identifying “a substantial margin of spare capacity in the economy” and asserting that “Once the effects of last year’s cost shocks wane, the disinflationary impact of weak demand conditions is expected to dominate, therefore companies will have limited ability to pass on higher production costs into prices. The inflation target can be met on the horizon relevant for monetary policy. The improved global financial market environment and the Government’s commitment to maintaining a low fiscal deficit path may contribute to a sustained decline in risk premia on domestic assets. These factors warranted and allowed a further cautious easing of monetary conditions.” 

The back story to Hungary’s easier monetary policy, similar to that of the Bank of Japan, is heavy pressure from government officials for the central bank to promote growth.  The government’s influence will climb further soon.  The central bank governor’s term expires in early March, giving Prime Minister Orban an opportunity to appoint a policy dove.

Copyright 2013, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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