Hungary: Central Bank extends rate cut cycle and signals potential for further cuts
June 24, 2014
At its 24 June monetary policy meeting, the Central Bank decided to cut the base rate by 10 basis points from 2.40% to 2.30%, marking the lowest level on record. The decision met market expectations. This is the twenty-third consecutive meeting in which the Bank has decided to cut the base rate in order to boost the economy.
In the June 2014 inflation report, the Central Bank stated that the reductions in the base rate that have been implemented since August 2012 were justified by low inflation, small inflationary pressures and continuing spare capacity in the economy. Furthermore, according to the Bank, the interest rate cuts have helped to achieve the medium-term inflation target and support economic growth.
Regarding future developments, the Bank affirmed that there still is a degree of spare capacity in the economy, but that it expects the negative output gap to decline progressively. However, the Bank pointed out that inflationary pressures are expected to remain moderate and left the option open to cut the interest rate further, stating that, “achieving price stability in the medium term points in the direction of monetary easing and the macroeconomic outlook points in the direction of persistently loose monetary conditions.” Moreover, the Bank said that, taking into account the inflation outlook and economic risks and developments, “further cautious easing of monetary policy may follow.”
Regarding a potential extension of the rate cut cycle, Dan Bucsa, economist at UniCredit, stated:
“The central bank could cut the base rate below 2% after it changed its average inflation forecast for 2014 to 0.0%yoy from 0.7%yoy in the March inflation report. Even so, large base effects will push inflation higher towards the end of the year, reducing the scope for lowering the base rate.”