The monetary council of Hungary's central bank decided on April 23 to cut the base rate by 0.25bps to a new historic low of 4.75%, the bank said in a statement on its website. This was the ninth consecutive reduction. The decision was broadly expected by market analysts, although a 0.5pps cut also expected.
The rate setters considered that inflation fell below the central bank’s inflation target already at the beginning of 2013 due to reduced utilities prices and the strong downward pressure stemming from subdued demand. The outlook for inflation and the real economy point to a further easing in monetary conditions.
The central bank expects economic growth to resume in 2013 as the country’s export markets improve. However, the external and, to a greater extent, domestic demand factors point to only modest growth. Although household real income growth is expected to recover in the low inflation environment, households consumption behaviour is likely to be cautious and the saving rate to remain high and therefore consumer demand is likely to strengthen only from 2014.
The rate setters concluded that risk premia on Hungarian financial assets fell significantly, reflecting an improvement in the international environment. However, the contrast between the benign financial market environment and weak real economic activity still remains, which warrants a cautious approach to policy. The council will consider a further reduction in interest rates if the medium-term outlook for inflation remains in line with the bank’s 3% target and the improvement in financial market sentiment is sustained.
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