The monetary council of Hungary's central bank decided on August 27 to cut the base rate by 20bps to a new historic low of 3.80%, the bank said in a statement on its website. The bank slowed the pace of the rate cutting cycle, as it reduced the base rate by 25bps in each of the previous twelve months. Moreover, the rate cut came as a surprise for the market, which expected a 10bps reduction.

The rate setters expect weak demand conditions to persist, which will ensure that inflationary pressures in the economy remain muted in the mid-term. However, gradual improvement in domestic demand is expected in the coming period, which will support economic recovery. At the same time, there is uncertainty about future developments in external demand, caused by the slowdown in growth in emerging markets.

According to the council’s assessment, increased volatility in sentiment in global financial markets and the uncertain outlook for global economic growth continue to pose a risk, which in turn calls for maintaining a cautious approach to policy. Perceptions of the risks associated with the Hungarian economy have increased slightly in the uncertain global financial environment.

A sustained and marked shift in perceptions of the risks may influence the room for manoeuvre in monetary policy, the central bankers said. In light of the significant reduction in interest rates so far and taking into account developments in perceptions of the risks associated with the economy, a slower pace of policy easing is warranted.