Hungary's central bank, which earlier cut its benchmark rate for the fifth time this year, said it would consider further rate cuts but underlined this would "only" occur if sentiment in financial markets continues to improve and there is evidence that the inflation target is achievable.
The statement by the National Bank of Hungary signals the bank's Monetary Council is likely to pause in its cycle of rate cuts that have reduced the rate by 125 basis points this year to 5.75 percent.
The central bank said the high level of excess capacity in Hungary's economy will offset the medium-term inflationary risks and it expects to meet its 3 percent inflation target even if monetary conditions were eased.
"Given the slack conditions in the labour market, the rate of earnings growth is likely to slow as the effects of administrative measures fade," the bank said, adding:
"The Council will consider a further reduction is interest rates only if the improvement in financial market sentiment continues and incoming data confirm that the inflation target is achievable on the horizon relevant for monetary policy.
Last month the central bank also said it would consider further rate cuts but now it has made further rate cuts conditional on improved financial market sentiment and lower inflation.
Hungary's inflation rate fell to 5.2 percent in November from October's 6.0 percent and the bank admitted inflation has remained persistently above its target despite the recession. But the high rate of inflation mainly reflects the effect of commodity price shocks and higher indirect taxes while the pace of underlying inflation remains moderate, it said.
"Looking ahead, inflation is expected to slow significantly in the short term, mainly reflecting movements in items excluded from the core measure, " the bank said.
Hungary's economy remains in recession, with Gross Domestic Product contracting by 0.2 percent in the third quarter from the second for an annual decline of 1.5 percent, up from an annual shrinkage of 1.3 percent in the second quarter.
The economy's potential growth rate has also fallen significantly, the bank said, reflecting the postponement of investment decisions and financing constraints on companies.