Hungarys central bank cuts base rate to 5.75%, in line with expectations.

By bne IntelliNews December 19, 2012
The monetary council of Hungary's central bank decided on December 18 to cut the base rate by 0.25bps to 5.75%, which was the fifth consecutive reduction since July 2012, the bank said in a statement on its website. The decision was broadly expected by market analysts, who believed that all four external members of the MC will again outvote the three internal members, as they did in the previous four meetings. Rate setters also discussed a proposal to keep the base rate on hold. They concluded that persistent weak domestic demand would have a substantial disinflationary impact on the economy, which would increasingly dominate inflation developments as the cost shocks keeping inflation high in the short term dissipated, thereby helping to meet the inflation target. In addition, Hungarian risk premia has declined markedly, since global risk appetite increased significantly. The council considers that there are both upside and downside risks to changes in risk perceptions. The contrast between weak global economic activity and strong risk appetite in international financial markets warrants a cautious monetary policy stance, the council said. On the other hand, external factors such as institutional reforms in the euro area, the reduction in fiscal risks in the US, as well as expectations for successful fiscal consolidation in Hungary may prompt further monetary easing. Maintaining its earlier position, the council continues to consider it crucial that an agreement between the government and the IMF and EU be reached. The central bank forecast that the level of potential output is likely to increase very modestly over the next two years, reflecting the sustained weakness in investment and persistently high unemployment. Domestic balance-sheet deleveraging will continue, with consumption and investment likely to fall further, mainly due to tight credit conditions and the uncertain business environment. The bank slashed its forecast for the average annual inflation in 2013 to 3.5% from 5.8% projected last September. The reduction followed an announcements by the government in early December that household energy prices would be cut by 10% from the beginning of 2013. This would cut a full percentage point off CPI, bank governor Andras Simor told MTI news agency. In addition, changes to the pace and the scale of excise tax increases will take another 0.4pps off the index. The bank will publish its detailed macroeconomic forecast on Thursday (December 20).

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