Hungary's central bank cut its base rate for the ninth time in a row, as expected, to 4.75 percent and said it would consider further rate cuts if the outlook for inflation remains in line with the bank's target and sentiment in financial markets remains positive.
The guidance by the National Bank of Hungary signals that it will continue the easing cycle that it started in August 2012. Since then, the central bank has cut it key rate by 225 basis points and by 100 basis points this year alone.
The central bank expects Hungary's economy to resume growing this year, helped by better exports, but the level of output remains below its potential and unemployment above its long-term level.
"The council expects weak demand conditions to persist, which will ensure that inflationary pressures in the economy remain muted in the period ahead,"the bank said, adding that the decline in inflation confirms that weak demand is exerting a strong downward pressure on prices.
Hungary's inflation rate fell to 2.2 percent in March, down from 2.8 percent in February and the seventh month in a row with declining inflation since a recent peak of 6.6 percent in September last year. It was the lowest inflation rate observed since September 1974.
The central bank, which targets inflation of 3.0 percent, said inflation is likely to remain below its target throughout this year and settle close to the target in 2014.
Hungary's Gross Domestic Product contracted by 0.9 percent in the fourth quarter from the third quarter, the fourth consecutive quarterly contraction. On a year-on-year basis, the economy shrank by 2.7 percent from the fourth quarter of 2011.
Consumer demand is expected to remain modest in the period ahead with consumers behaving cautiously and keeping the savings rate high due to increased uncertainty about the economic environment and a protracted process of reducing debt.
Last month the central bank said it would consider further rate cuts if inflationary pressures remain moderate and largely repeated this forecast today.
"The Council wil consider a further reduction in the policy rate if the medium-term outlook for inflation remains in line with the Bank's 3 percent target and the improvement in financial market sentiment is sustained," the bank said.