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MNB continues easing cycle

Interview

The National Bank of Hungary's Monetary Council decided on Tuesday to cut the central bank's key rate by another 25bp – to 5.25pc – for the seventh monthly meeting in a row. The decision was in line with market expectations.

The Council said at the previous rate-setting meeting that further easing could be considered if "the medium-term outlook for inflation remained consistent with the bank's 3% target and the improvement in financial market sentiment was sustained".

Hungary's CPI was 3.7% year-on-year in January, slowing markedly from a 5.0% increase in the previous month as tax hikes left the base period.

Speaking at a press conference after the meeting, MNB governor András Simor said the Council voted on two options: one to keep the base rate on hold and the other to cut it by 25bp. The latter proposal was supported by a "narrow majority", he said.

At the previous six meetings, the Council's four external members outvoted the three internal members to further loosen the MNB's monetary policy, showing a clear rift over the degree to which weak domestic demand can keep inflation down.

In a statement published after the meeting on Tuesday, the Council explained its decision to cut rates citing fresh data that show weak demand continues to have a "strong disinflationary impact on prices", limiting companies' ability to pass on higher production costs into prices. It added that the favorable global financial market environment could lead to a sustained fall in domestic financial asset prices.

"The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains consistent with the bank's 3% target and the improvement in financial market sentiment is sustained," it added.

The condensed minutes of the meeting will be published at 2pm on March 13.

Simor praised the work of the MNB's staff of experts and said he hoped most would stay with the central bank after his mandate ends.

Simor's six-year term ends on March 2. The prime minister's – as yet unnamed – nominee to replace him is expected to speak at a parliamentary committee hearing on Friday.

Asked to name the positive highlights of his term as governor, Simor noted the elimination of the forint's intervention band in 2008, the MNB's efforts to help Hungary avoid becoming a victim of the global financial crisis and its assistance with the country's recovery, the introduction of same-day settlement and the defense of the central bank's legal independence.

Simor said the MNB's more than six months of rate cuts had so far done little to support an increase in lending activity. Credit supply, not interest conditions, are creating the bottleneck, especially with regard to corporate lending, he added.

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