Hungary: Central Bank cuts base rate substantially and announces end of rate cut cycle
July 22, 2014
At its 22 July monetary policy meeting, the Central Bank cut the base rate by 20 basis points from 2.30% to 2.10%, which is the lowest level on record. In addition, the Bank clearly signaled that the easing cycle has come to an end. The extent of July’s cut came as a surprise to market analysts who had expected a smaller cut of 10 basis points. The Central Bank has continually lowered the base rate since August 2012 when it rested at 7.0%.
In the accompanying statement, the Central Bank noted that the rate cut was necessary to achieve price stability in the medium term and that the base rate is now at a level that is consistent with the Bank’s 3.0% target inflation rate. Furthermore, the Bank stated that this rate will also support the real economy. The Bank explained that, despite the current low levels of inflation and moderate inflationary pressures, it expects inflation to approach its target rate in the medium term because domestic-demand side inflationary pressures are expected to increase on rising economic activity. In addition, the Bank noted that it expects economic growth to continue in the medium term, with the domestic economy gaining importance as driver of growth. Consumption and investment are also expected to rise. Increased EU funding and the Central Bank’s credit easing initiatives, such as the Funding for Growth Scheme, are expected to drive investment growth.
Regarding the decision to end the rate cut cycle, the Bank said that this move is aimed at removing uncertainty regarding the bottom of the easing cycle. In addition, the Bank noted that it expects to maintain a loose monetary policy stance for an extended period of time.