The monetary council (MC) of Hungary's central bank decided on March 25 to cut the base rate by 10bps to a new historic low of 2.60%, the bank said in a statement on its website. This was the nineteenth consecutive reduction, which was broadly expected by market analysts. The bank slowed down the easing pace after 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 monetary policy horizon and therefore the disinflationary impact of the real economy is likely to decrease looking forward.
The central bankers believe that there is still some scope for a cautious reduction in interest rates in the context of heightened uncertainty in global financial markets. The MC would slow down further the monetary easing pace in case of higher uncertainty. Furthermore, the monetary easing cycle could be stopped in case of a significant deterioration in global financial market environment.
In its macroeconomic assessment, the bank noted than economic activity picked up gradually in the past quarters, with output rising across a wide range of sectors. The bank expects rising exports to play an important role as a source of growth in the coming years, supported by new production capacity in the automobile industry. 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 0.7% 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. The bank will publish its detailed macroeconomic forecast in a couple of days.
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