Hungary's central bank cut its base rate by another 15 basis points to 2.70 percent, its 19th cut in a row, but signaled that it may call a halt to further cuts by saying it would first decide on further moves following a review of the economic outlook in next month's economic forecast.
The National Bank of Hungary, which has cut rates by 430 basis points since embarking on an easing cycle in August 2012, noted a deterioration in investors' view of Hungary and other emerging markets during the recent volatility in global financial markets, with the country's bond yields rising and higher volatility in the forint's exchange rate.
"In the council's judgement, a cautious approach to policy is warranted due to uncertainty related to the global financial environment," the central bank said.
However, the central bank also said Hungary's position was stronger than other emerging market economies, pointing to a decline in its external debt and a surplus in the current account that has reduced the country's reliance on foreign investors.
But the central bank acknowledged that room for manoeuvre in monetary policy was influenced by investors' perception along with how well inflation was approaching its 3.0 percent target.
"The Monetary Council will decide on the need and possibility for continuing the easing cycle after a comprehensive assessment of the macroeconomic outlook and developments in perceptions of the risks about the economy in view of the baseline projection and alternative scenarios of the March forecast," the central bank said.
Hungary's headline inflation rate fell to zero in January from 0.9 percent in December while the central bank's own gauge of underlying inflation showed a rise in core inflation to 1.6 percent in January from 1.1 percent in December.
The drop in inflation was due to a moderation of fuel prices and the central bank said its own inflation gauge indicated moderate inflationary pressures due to weak domestic demand and low external inflation, helping anchor inflation expectations.
"Domestic real economic factors are expected to continue to have a disinflationary impact, although to a declining extent, as activity rises further," the central bank said. The bank has said it expects inflation to move back toward its 3.0 percent target by the second quarter of 2015.
Economic growth in Hungary is likely to continue to strengthen this year and next and while employment is rising, the central bank said unemployment still exceeds the long-term level and there is unused capacity so inflationary pressures are likely to remain subdued over the medium term.
Hungary's Gross Domestic Product expanded by a higher-than-expected 0.6 percent in the fourth quarter from the third quarter for annual growth of 2.7 percent, up from 1.8 percent, and the central bank said growth should pick up further in the quarters ahead, helped by higher corporate investment.
But growth in real incomes will be partly offset by continued reduction in debt that was accumulated in the years before the financial crises.
From August 2012 the central bank cut rates in 25-basis point increments until August 2013 when it reduced the pace of rate cuts to 20 basis points following an large outflow of capital from emerging markets, including Hungary. The central bank continued cutting rates in 20-basis points increments until last month when it reduced this to 15 basis points, as this month.
Hungary's forint currency has been depreciating against the euro since mid-2012 and has continued to decline this year. The forint was trading at 310.33 to the euro today, down 4.3 percent since the beginning of the year.
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