Another Hungarian Central Bank Base Rate Reduction

April 21, 2015

The Monetary Council at Magyar Nemzeti Bank sliced its base rate by 15 basis points to 1.95%.  A similar-sized cut at the March monthly meeting had broken a policy pause over the eight prior months.  For two years from August 2012 through July 2014, policy was loosened every month, taking the base rate from 7.0% to 2.1%.  If macroeconomic trends continue as central bank officials project, more rate cuts will be made.

Low inflation has driven the downward trend of the base rate.  According to today’s statement from the Council, “if the assumptions underlying the Bank’s projections hold,the inflation outlook and the cyclical position of the economy point in the direction of a reduction in the policy rate and loose monetary conditions for an extended period. Cautious easing of the policy rate may continue as long as it supports the achievement of the medium-term inflation target.”  Several disinflationary forces are cited: persistently low inflation in external markets, subdued imported inflation, the degree of unused capacity in the economy and the moderation in inflation expectations.  All in all, “there is a degree of unused capacity in the economy and inflationary pressures are likely to remain moderate for a sustained period. The real economy is likely to have a disinflationary impact at the policy horizon and the negative output gap is expected to close only gradually.”  But global financial market uncertainties argue for caution as monetary easing continues.  On a positive note in this regard, the statement observes, however, that “Hungary’s persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability.”  The next scheduled rate announcement is May 26.

Copyright 2015, Larry Greenberg.  All rights reserved.  No secondary distribution without express permission.



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