Hungary: Central Bank cuts rates further to rekindle growth
February 26, 2013
At its 26 February monetary policy meeting, the Central Bank cut the base rate by 25 basis points to 5.25% in a move widely expected by the market. The decision marked the seventh consecutive rate cut as authorities continue to fight recession.
The decision reflected the Central Bank's view that weaker domestic demand will have a further disinflationary effect on the economy. The Bank, however, noted that economic growth is likely to resume this year amid an improvement in the external sector, whereas domestic demand will remain weak, as investment deteriorates and high unemployment drags on consumption.
Regarding price developments, the Monetary Council stated that "the short-term outlook for inflation improved significantly as a result of the lower-than-projected price increases around the start of the year and the government measures affecting the prices of items excluded from the core measure".
Meanwhile, on 4 March, former Economy Minister Gyorgy Matolcsy replaced Andras Simor as Governor of the National Bank of Hungary. Matolcsy, the architect behind the unconventional fiscal policies that seized private-sector assets for the state and increased taxes on big businesses, is expected to continue using unorthodox policies to devaluate the forint and rekindle economic growth.
The appointment followed Prime Minister Victor Orban's recommendation and is thus seen by market analysts as a move to further increase the government's influence over the Central Bank. In addition, Orban nominated Adam Balog, deputy state secretary, as the Bank's third deputy governor. Moreover, the parliament, controlled by the ruling Fidesz Party, named Gyula Pleschinger as external member. However, Pleschinger is a likely candidate to replace deputy governor Ferenc Karvalits, whose mandate expires on 27 March. If confirmed, all but one of the nine members of the board will have been appointed either by Orban or by his Fidesz Party, therefore seriously compromising the independence of Hungary's monetary authorities.
FocusEconomics Consensus Forecast panellists anticipate the Central Bank will cut interest rates further this year, resulting in a 4.98% year-end rate. For next year, the panel expects interest rates at 5.21%.