The monetary council of Hungary's central bank decided on October 29 to cut the base rate by 20bps to a new historic low of 3.40%, the bank said in a statement on its website. This was the fifteenth consecutive reduction, which was broadly expected by market analysts. The bank slowed the pace of the rate cutting cycle already in August, as it reduced the base rate by 25bps in each of the previous twelve months.
Hungarian economy is likely to expand gradually this year, followed by a further pick-up in growth next year. Considering that external economic activity is expected to strengthen and weak domestic demand conditions to persist, rate setters noted that inflationary pressures in the economy are likely to remain subdued in the medium term.
Weak domestic demand has already determined the low rate of underlying inflation since the beginning of 2013. Subdued wage dynamics suggest that companies are adjusting to higher production costs mainly through the labour market, and therefore the pass-through into consumer prices is likely to be moderate.
Although perceptions of the risks associated with the Hungarian economy have improved over the past month the central bankers noted that changes in sentiment in global financial markets continue to pose a risk, which in turn calls for maintaining a cautious approach to policy.
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