Tuesday, August 27, 2013

Hungary says scope to cut more, slower pace warranted

    Hungary's central bank, which earlier today trimmed its base rate by 20 basis points, said the rate of inflation and growth gave it "scope to ease monetary conditions further" but a slower pace of easing is warranted given the significant reduction in rates so far and financial market's perception of risks associated with the country's economy.
    The National Bank of Hungary, which earlier today cut its rate for the 13th time in a row to 3.80 percent, said there were no significant inflationary pressures and the risks to inflation should remain moderate in the medium term, which will help anchor inflation expectations.
    "In the current environment, monetary conditions can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions," the bank said.
    The central bank's reference to a slower pace of future monetary easing signals that the bank is getting closer to a more neutral policy stance. Last month the bank said it would change the pace or extent of future easing, the first major shift since the bank embarked on its easing cycle in August last year. Since then, it has cut rates by 320 basis points, including 195 points this year alone.
    The central bank said it still expects Hungary's economy to recover gradually this year but the level of output remains below its potential and unemployment exceeds it long-term levels.

    "The council expects weak demand conditions to persist, which ensures that inflationary pressures in the economy remain muted in the medium term," the bank said.
    Hungary's inflation rate eased to 1.8 percent in July from 1.9 percent in June, reflecting the strong downward pressure of weak domestic demand on prices, the bank said. The central bank targets inflation of 3.0 percent.
    Hungary's Gross Domestic Product expanded by 0.1 percent in the second quarter from the first for annual growth of 0.5 percent, up from a contraction in the previous five quarters.
    But the central bank said it expects an improvement in domestic demand to be slow and gradual due to ongoing deleveraging and cautious behaviour by households while activity in external demand is showing signs of a revival despite the slowdown in growth in emerging regions.
    Like other emerging markets, Hungary has been hit by an outflow of capital and currency depreciation and after a temporary stabilisation, global financial markets have become volatile again.
    "Perceptions of the risks associated with the Hungarian economy have increased slightly in the uncertain global financial environment," the bank said, adding the volatile sentiment continues to pose a risk and this calls for a cautious approach in monetary policy.
    After weakening in early 2011, Hunary's forint depreciated in late 2011 and the rose during most of 2012. But in the second half of last year through late March this year, the forint weakened. It then strengthened until market sentiment changed in May when investors started to shift their portfolios ahead of stronger growth in advanced economies and a wind down of asset purchases by the U.S. Federal Reserve.
    Since the start of the year, the forint has depreciated by 3.4 percent against the euro, trading at 301.6 to the euro today.



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