The monetary council (MC) of Hungary's central bank decided on July 22 to cut the base rate by 20bps to a new historic low of 2.10%, the bank said in a statement on its website. This was 23rd consecutive reduction and came as a surprise for the market analysts, who expected a 10bps cuts. The central bankers agreed that the reduction in July puts an end to the easing cycle that started in August 2012 and brought a cumulative reduction of 490 basis points. The base rate has reached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the economy, the central bankers said.
The MC members believe that the historically low inflation environment has been determined by subdued inflation in external markets, the degree of unused capacity in the economy, subdued wage dynamics, lower inflation expectations and the cuts in regulated prices. Domestic real economic and labour market factors continue to have a disinflationary impact as well. The bank expects inflation to remain well below the 3% target at the end of the forecast horizon.
The rate setters agreed that Hungarian risk premia has remained broadly unchanged during the last month and the forint exchange rate depreciated slightly, with country-specific factors playing a role, in addition to external factors. The country’ persistently high external financing capacity and the resulting decline in external debt have contributed to the reduction in its vulnerability. The Council judged a cautious approach to policy should be warranted due to uncertainty about future developments in the global financial environment.
In its macroeconomic assessment, the bank noted that economic activity gains strength as reflected in data for industrial production and retail trade. 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 and is likely to make a greater contribution. Investments are seen picking up further and household consumption is also likely to grow gradually, mainly as a result of the expected increase in the real value of disposable income and the reduced need for deleveraging.
The central bank lowered in June 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.
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