Hungary's central bank keeps key rate on hold ending easing cycle

By bne IntelliNews August 27, 2014

The monetary council (MC) of Hungary's central bank decided on August 26 to keep the base rate at the record low of 2.1% ending a monetary easing cycle that lasted for two years and brought the main rate down from 7% in 2012, the bank said in a statement on its website. The move was expected by the market and is in line with the bank’s guidance announced last month.

The bank will aim to keep rates unchanged for an extended period to support economic growth.

The central bankers agreed that 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 MC members believe that the historically low inflation environment is 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 implemented in a series of steps. Domestic real economic and labour market factors continue to have a disinflationary impact as well. However, domestic demand-side disinflationary pressures are gradually weakening and inflation will likely come closer to the bank’s target of 3% by 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 along with other currencies in the region. 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 economic growth to continue in a more balanced pattern with domestic demand 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.

 

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