Tuesday, January 21, 2014

Hungary slows rate cut pace to 15 bps, 18th cut in a row

   Hungary's central bank trimmed its base rate by 15 basis points to 2.85 percent, its 18th rate cut in a row, as inflation continues to drop.
    The National Bank of Hungary, which cut rates by 275 basis points in 2013 and 400 points since embarking on its easing cycle in August 2012, did not immediately issue any statement accompanying its brief notice that the base rate was cut with effect from Jan. 22.
    The central bank said in December that "further easing of monetary policy may follow, but a reduction in the increment is likely to be warranted."
    Initially, the central bank had cut rates in 25 basis points increments but then switched to 20 basis point cuts in August 2013 after global investors reassessed the growth prospects for emerging markets and the U.S. Federal Reserve signaled that it was considering reducing its asset purchases.
    Economists had widely expected Hungary's central bank to continue cutting rates this month as inflation fell to only 0.4 percent in December from 0.9 percent in October and November, continuing the decline since September 2012 when inflation hit 6.6 percent.

    Last week Gyula Pleschinger, board member of the central bank, told the Wall Street Journal that Hungary still had room to lower its interest rates as the economic recovery remains fragile, inflation is low and the prospect of less stimulus from the Fed was no longer a threat.
    She also said that Hungary's bond auctions were proceeding smoothly and the forint currency was trading in the usual range to the euro.
    Hungary's Gross Domestic Product expanded by 0.9 percent in the third quarter from the second quarter, the third quarter of growth after four consecutive quarters of contraction in 2012. On an annual basis, third quarter GDP grew by 1.8 percent, up from 0.5 percent in the second quarter.
    Despite Pleschinger's confidence, the central bank has often expressed its concern over how investors' view of the risk of Hungary can quickly change and how this is influencing the room for manoeuvre in monetary policy.
    Minutes from the central bank's December meeting showed that seven of its board members voted to cut the rate by 20 basis points while two members, including Pleschinger, voted for a 10 basis point cut.
    Starting with the central bank's easing cycle in August 2012, the forint has weakened and the pace accelerated in the first few months of last year. Between August 2012 and March 2013, the forint fell some 10 percent against the euro, hitting a 2013 low of 306.8 to the euro. Since then, the forint has been trading in a range between 290-300 to the euro though in recent days the forint has weakened further and was trading around 303 to the euro earlier today.
    The central bank has often said that it expects inflationary pressure to remain muted in the medium term due to weak domestic demand and low global inflation before slowly moving back toward the bank's 3.0 percent target by the second quarter of 2015.
    The December inflation rate of 0.4 percent was reportedly a 43-year low.
    In December last year, the central bank's governor, Gyorgy Matolcsy, said the bank could cut its rate by 2.5 percent but admitted lower rates than that were risky.




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