Hungary: Central Bank cuts rate for 10th month in a row
May 28, 2013
At its 28 May monetary policy meeting, the Central Bank cut the base rate by 25 basis points to 4.50% in a move widely expected by the market. The decision marks the 10th consecutive rate cut, as authorities continue to attempt to boost the economy amid low inflation.
The Bank affirmed that the economy is still operating below its full capacity and that unemployment is above its long-term trend due to structural factors. The Bank, however, stated that it expects growth to resume following the recession in the first half of this year. In particular, sustained growth recovery is likely to happen close to the end of the year as demand for Hungarian exports is expected to improve. Nevertheless, monetary authorities argued that current weak global economic activity combined with the current benign financial market environment for Hungary warrants a cautious approach to policy.
Regarding price developments, the Monetary Council believes that weak demand will keep on exerting a strong downward pressure on prices. According to the Bank, the weak pace of earning growth shows that firms are adjusting the increase in production costs through the labour market, for this reason the pass-through on consumer prices will be moderate. In addition, reductions in energy and consumer prices, as well as the appreciation of the forint have contributed to the drop in inflation. The Bank maintained a dovish stance, stating that it will consider cutting interest rates further if inflationary pressures remain moderate in the medium run and prices are in line with its +/-1 3% inflation target.
FocusEconomics Consensus Forecast panellists anticipate the Central Bank will keep rates at 4.49% this year. For next year, the panel expects interest rates at 4.67%.