The monetary council (MC) of Hungary's central bank decided on April 29 to cut the base rate by 10bps to a new historic low of 2.50%, the bank said in a statement on its website. This was the twentieth consecutive reduction, which was broadly expected by market analysts. The bank slowed down the easing pace already in March following 15bps cuts in January and February.

The rate setters consider that there remains a degree of unused capacity in the economy and inflation is likely to move in line with the target in the medium term. The negative output gap is expected to close gradually at the end of the monetary policy horizon and therefore the disinflationary impact of the real economy is likely to decrease looking forward.

As in the previous month, central bankers noted that the interest rate has significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the real economy. Changes in the domestic and international environment might influence this picture, over the coming period, the bank said.

In its macroeconomic assessment, the bank noted that economic activity continued to strengthen in April. It expects growth to pick up gradually in the quarters ahead and to return to a more balanced pattern, with domestic demand likely to make an increasing contribution. Recovery of household consumption is likely to be gradual. In addition, labour market data suggested for a tighter market.

The central bank lowered in March its forecast for the average annual inflation in 2014 to 0.7% from 1.3% projected in December 2013. Inflation is projected to speed up to 3% in 2015. At the same time, the bank maintained its 2014 GDP growth projection to 2.1%. According to the forecast, GDP growth will accelerate to 2.5% y/y next year.