Hungary: Central Bank cuts rates further in June amid weak domestic demand
June 25, 2013
At its 25 June monetary policy meeting, the Central Bank cut the base rate by 25 basis points from 4.50% to 4.25%, in a move widely expected by the market. The decision marks the 11th consecutive rate cut, as authorities continue to attempt to boost the economy amid low inflation.
The Bank stated that the rate cut was needed due to the weakness of domestic demand. That said, the Bank stated that it expects growth to continue in the next quarters, albeit at a slow pace and likely driven by the export sector, in particular in the automobile industry. Meanwhile, the Bank expects domestic demand to stabilize following the decline observed in the previous years. Although household income is expected to grow, precautionary motives and tight lending conditions might hold back a strong recovery in consumption.
Regarding price developments, the Monetary Council reckons that inflation will likely continue to ease in the short term driven by commodity and administered prices, reflecting the disinflationary impact of weak domestic demand. In the longer term, increases in production costs in some sectors, following the application of government measures, will likely take time to pass-through to consumers due to low capacity utilization. The Bank maintained a dovish stance, stating that it will consider cutting interest rates further as long as inflationary pressures remain moderate in the medium run and the condition of the real economy justifies it. This should allow the Central Bank to reach its 3% inflation target with looser monetary conditions.
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%.