The monetary council (MC) of Hungary's central bank decided on January 21 to cut the base rate by 15bps to a new historic low of 2.85%, the bank said in a statement on its website. This was the eighteenth consecutive reduction. In line with the indications from their previous meeting in December, the rate setters slowed the pace of the monetary easing. However, the 15bps reduction came as a surprise for the market, which expected a 10bps cut, according to most of the analysts polled by portfolio.hu and Reuters.

The central bank sees moderate inflationary pressures in the local economy, which reflects the effects of weak domestic demand and low inflation in external markets. Domestic real economic factors are expected to continue to have a disinflationary impact, although to a declining extent, as activity rises further.

The rate setters consider that economic growth is expected to continue in the quarters ahead and is likely to be more balanced than previously. In particular, growth in domestic demand is expected in addition to rising exports. With the increase in corporate investment due to the Funding for Growth Scheme and the government’s infrastructure projects using EU funding, the recovery in household consumption is likely to be gradual.

The central bankers concluded that a sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy. According to them, further cautious easing of monetary policy may follow.