Hungary's central bank cut its base rate by another 20 basis points to 3.60 percent, its 14th rate cut in a row, and said "further cautious easing of monetary conditions may follow" due to muted inflationary pressures and a signficant degree of spare capacity in the economy.
The National Bank of Hungary, which has cut rates by 215 basis points so far this year, also said any shift in financial markets' perceptions of risks associated with the country's economy may influence the room for manoeuvre in monetary policy.
"Achieving the 3 percent inflation target over the medium term provides scope for further monetary easing," the bank said after a meeting of its monetary council.
Hungary's inflation rate fell to 1.3 percent in August from July's 1.8 percent, continuing the decline since a recent high of 6.6 percent in September 2012, due to subdued domestic demand, lower external inflationary pressures, reductions in regulated prices and the adjustment of inflation expectations.
Government measures to raise production costs are likely to feed through to the corporate sector, the bank said, though the pass-through to consumer prices is likely to be partial due to low demand.
"Overall, inflationary pressures are likely to remain muted over the medium term," the bank said.
Hungary's central bank started its easing cycle in August last year to counter slow economic growth and has now cut rates by a total of 3.40 percentage points since then. The rate cuts were in 25 basis points increments until last month when the central bank slowed the pace of easing to 20 basis points due to the cuts already carried out and the volatile conditions in global financial markets.
The central bank expects growth to pick up gradually in coming quarters, helped mainly by exports with the installment of new capacity in the country's automobile industry and some improvement in domestic demand.
"Overall, demand is likely to remain below the productive capacity of the economy, and therefore the real economic environment is expected to remain disinflationary looking ahead. The negative output gap may close at the end of the forecast horizon," the central bank said.
In the second quarter, Hungary's Gross Domestic Product expanded by 0.1 percent from the first quarter for annual growth of 0.5 percent, the first quarter with a positive growth rate since the fourth quarter of 2011.