As expected, MNB cuts base rate to 3.20%

Analysis

The National Bank of Hungary (MNB)’s Monetary Policy Council decided at a meeting on Tuesday to reduce the central bank’s key rate by 20 bp to 3.20%, as expected by the market. With the cut, the rate-setters continued an easing cycle started in August 2012.

The Council cut the base rate by 25 bp at each of its monthly rate-setting meetings from the beginning of the cycle until last August, when it started making 20 bp reductions.

After the previous rate-setting meeting, in October, the Council said “further cautious easing of policy might follow” in light of the outlook for inflation and the real economy, as well as perceptions of risks associated with the economy. Council members noted the disinflationary impact of weak domestic demand, decisions by companies to adjust wages rather than pass higher production costs on to consumers, and the possibility that the low inflation environment could help anchor inflation expectations.

MNB governor György Matolcsy said in an interview last week that the central bank could continue its easing cycle as long as the rate of inflation continues to fall: “When the rate of inflation comes down, we can follow the decreasing inflation track. If it stops, we have to stop. But, as far as the rate of inflation is concerned we still see the room to manoeuvre with regard to the base rate,” Matolcsy told CNBC.

Twelve-month consumer price inflation dropped below the central bank’s 3% inflation target on a government-initiated cut in utility prices in February and fell to 0.9%, an almost 40-year low, in October.

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