The monetary council of Hungary's central bank decided on June 25 to cut the base rate by 0.25bps to a new historic low of 4.25%, the bank said in a statement on its website. This was the eleventh consecutive reduction, which was broadly expected by market analysts.

The rate setters consider that weak domestic demand and slack in the labour market have a strong disciplinary effect on economic agents’ price and wage-setting decisions, while temporary effects have also contributed to a reduction in inflation this year. Looking ahead, the output of the Hungarian economy is likely to return to its potential level only gradually, which suggests that inflationary pressures will remain moderate.

However, uncertainty for future monetary policy has been determined by the negative output gap in the economy and the global financial market environment. Developments related to the quantitative easing programmes implemented by leading central banks will be key in sustaining the supportive financial market environment. A further uncertainty arises from the possibility that the euro-area recession will be more prolonged despite the significant efforts by European institutions

The rate setters agreed that as long as the outlook for inflation and the real economy justifies it, interest rates can be reduced further; however, increased caution is warranted in the volatile and rapidly changing global environment.

The bank lowered its forecast for the average annual inflation in 2013 to 2.1% from 2.6% projected in March. At the same time, it improved its 2013 GDP growth projection at 0.6% y/y from previously expected 0.5% y/y. The bank will publish its detailed macroeconomic forecast in a couple of days.