Hungary: Central Bank extends rate cut cycle and leaves open option for further rate cuts
May 28, 2014
At its 27 May monetary policy meeting, the Central Bank decided to cut the base rate by 10 basis points from 2.50% to 2.40%. The decision met market expectations. As a result, the interest rate now sits at the lowest level on record. This marks the twenty-second consecutive meeting in which the Bank decided to cut the base rate in order to boost the economy.
The Central Bank reaffirmed that, “economic growth is likely to continue,” but that output is still below potential. Furthermore, the Bank stated that despite an improving labor market and a falling unemployment rate, unemployment still exceeds, “its long-term level determined by structural factors.” Concerning price developments, the Bank added that inflationary pressures are, “likely to remain moderate over the medium term,” and that inflation continued to decline in April. Furthermore, it noted that while, “domestic real economic and labour market factors continue to have a disinflationary impact,” future growth in economic activity may increase demand-side inflationary pressures.
The Central Bank left options open for further rate cuts in stating that, “achieving price stability in the medium term points in the direction of monetary easing.” Furthermore, the Bank noted that “[t]he Monetary Council will decide on the need and possibility of reducing the base rate further after a comprehensive assessment of the macroeconomic outlook and developments in perceptions of the risks about the economy […].”
Regarding a potential end to rate cuts, Nora Szentivanyi, Executive Director, Emerging Markets Research at JPMorgan, stated:
The June Inflation Report and forint strength will likely allow the NBH to continue easing in coming months. Our base case is for two more 10bp rate cuts, to 2.2%, with risks tilted towards cuts to 2% if market conditions remain supportive. […] We do not see a rapid reversal of rate cuts even though real rates will likely turn negative by mid-2015. Recent policy steps to further reduce the share of FX debt will help to reduce external vulnerabilities and the forint continues to benefit from persistent external surpluses (C/A surplus plus EU funds plus net FDI plus net errors and omissions equals 8% of GDP). We do not expect rate hikes before 4Q15.