Hungary's central bank, which earlier announced its third interest rate cut in a row, said weak domestic demand will soon restrain inflation and the bank will consider further interest rate cuts if financial market sentiment remains healthy and the inflation outlook remains stable.
The Magyar Nemzeti Bank, which has cut its base rate by 75 basis points so far this year to 6.25 percent, said Hungary's economy was in recession and weak corporate investment and persistently high unemployment suggests that the economy's potential is "significantly below its pre-crises level."
With a "substantial margin of spare capacity in the economy," the central bank said cost shocks hitting have "no adverse effect on the medium-term outlook for inflation, and the disinflationary impact of weak domestic demand will dominate as the effects of cost shocks wane."
"The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment persists and the medium-term outlook for inflation remains consistent with the 3 percent target," the bank said in a statement.
Hungary's inflation rate rose to 6.6 percent in September, the highest since mid-2008, but the central bank said this was mainly due to higher food and fuel prices, along with increases in raw material prices and the effects of taxes and administrative measures.
Inflation is likely to remain above the bank's 3 percent target this year and next, and then gradually decline toward the target as the upward pressure of one-off price shocks fade.
Hungary's economy contracted by 0.2 percent in the second quarter from the first for an annual drop of 1.3 percent, slightly higher than the annual 1.2 percent drop in the first quarter.
But an improved global financial market sentiment, along with the government's commitment to cut its deficit has led to a sustained decline in risk premie for domestic assets, the bank said, urging the government to reach an agreement with the International Monetary Fund and the European Union.
"Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level," the bank said.