Tuesday, February 26, 2013

Hungary to cut rates again if inflation remains on target

    Hungary's central bank, which earlier today cut its base rate for the seventh time in a row, said it would consider cutting rates further if the outlook for inflation remains in line with its 3.0 percent target and the improvement in financial market sentiment is sustained.
    The forward guidance by the National Bank of Hungary is exactly the same as in previous months. Since August 2012, the central bank has cut rates by 175 basis points with the rate now at 5.25 percent.
    "In the Monetary Council's judgement, the economic data becoming available in the past month suggest that weak demand continues to exert a strong disinflationary impact on prices, and therefore companies will have limited ability to pass on higher production costs into prices," the bank said.
    In addition, favorable financial market conditions may lead to a sustained fall in Hungarian asset prices which means that the bank's inflation target can be met with looser monetary conditions.
    Hungary's economy contracted by more than expected in the fourth quarter of 2012, the bank said, adding that it expects growth to resume this year, helped by better exports.
    "However, external, and domestic demand factors in particular, point to only modest growth in the period ahead," the bank added.
    Hungary's Gross Domestic Product contracted by 0.9 percent in the fourth quarter from the third, the fourth quarterly contraction in a row, for an annual drop of 2.7 percent, up from the third quarter's annual decline of 1.5 percent.
        Last month the International Monetary Fund said in its annual review that Hungary's economy was estimated to have shrunk by 1.5 percent in 2012 following a 1.7 percent expansion in 2011.
    The IMF also said that further rate cuts by Hungary's central bank should be "considered very cautiously" as rate cuts are unlikely to have a material impact on aggregate demand, given the difficult operational environment for banks, and the foreign currency exposure of private and public balance sheets remains significant so any sizable currency depreciation could be destabilizing.
    Hungary's headline inflation rate slowed more than expected in January, the bank said, attributing the decline to a wide range of goods and services, along with a marked slowdown in underlying inflation which may reflect the "stronger-than-expected disinflationary impact of weak domestic demand."
    The inflation rate fell to 3.7 percent in January, down from December's 5.0 percent but still above the central bank's 3.0 percent target. Hungary's inflation rate jumped last year due to higher indirect taxes, which triggered price hikes, a depreciation of the forint plus higher food prices from bad weather.
     The central bank said global risk appetite had remained strong over the past month, but the contrast between improved investor sentiment and the modest outlook for global growth remains a risk, a warning the bank also issued last month.
    The success of Hungary's foreign currency-denominated bond issue had also reduced financing risks for the country and cooperation with the European Commission and the International Monetary Fund "might contribute to a further reduction in financing costs," the bank said.


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