The monetary council (MC) of Hungary's central bank decided on June 24 to cut the base rate by 10bps to a new historic low of 2.30%, the bank said in a statement on its website. This was 22nd 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 the persistent low inflation environment has been determined by subdued inflation in external markets, the degree of unused capacity in the economy, moderate wage growth, the fall in inflation expectations and the cuts in regulated prices. This will also help anchor inflation expectations playing a key role in determining the nominal path of the economy more firmly around the central bank’s inflation target. The bank expects inflation to remain well below the 3% target in 2014, before moving in line with the medium-term inflation target from the second half of 2015.
The rate setters agreed that the degree of unused capacity in the economy and inflationary pressures in the economy are likely to remain moderate for an extended period. Taking into account perceptions of the risks associated with the economy and the pick-up in economic growth, the central bankers noted that further cautious easing of monetary policy may follow. However, they believe that bank base rate has significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the economy.
In its macroeconomic assessment, the bank noted that economic activity picked up gradually in the past quarters, with output rising across a wide range of sectors. The bank expects higher exports to play an important role as a source of growth in the coming years. At the same time, domestic demand is also expected to strengthen. Investments are likely to pick up further and household consumption is likely to grow at a slower pace, notwithstanding the expected increase in disposable income.
The central bank lowered its forecast for the average annual inflation in 2014 to 0% from 0.7% projected in March 2014. Inflation is projected to speed up to 2.5% in 2015, also down from 3% previously projected. At the same time, the bank raised its 2014 GDP growth projection to 2.9%. According to the forecast, GDP growth will ease to 2.5% y/y next year. The bank will publish its detailed macroeconomic forecast in a couple of days.
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