Tenth Straight Central Bank Rate Cut in Hungary

May 28, 2013

Magyar Nemzeti Bank’s two-week repo rate has been cut for the tenth straight month by 25 basis points and now stands at 4.5%, down from 7.0% prior to last August.  The pre-2009 peak, by comparison, was at 11.5%.  Today’s reduction was anticipated by analysts, and the statement released by Hungarian monetary authorities today strongly hints of even more rate reductions: “The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains in line with the Bank’s 3 per cent target and the improvement in financial market sentiment is sustained.”  In Hungary, GDP is projected to emerge from recession this year but expand more slowly than its potential trend, and the jobless rate is above its long-term mean.  Both core and non-core components of inflation are contributing to disinflation.

The subdued rate of earnings growth suggests that companies are adjusting through the labor market more strongly in response to the increase in production costs, and therefore the pass-through into consumer prices is likely to be moderate. Recent developments in energy and commodity prices as well as the forint exchange rate have also contributed to the disinflation process.

Inflation fell sharply last month to a 12-month increase of 1.7%, which is below the target of 3%. 

There is a political element to monetary easing in Hungary.  Prime Minister replaced the central bank governor,Simor, by the loyal, malleable and dovish Gyorgy Matolcsy in early March.

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

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