National Bank of Hungary cuts key rate to 3.40%

Analysis

The National Bank of Hungary's Monetary Council decided at a meeting on Tuesday to reduce the bank's key rate by 20bp to 3.40%, yet another record low, in line with expectations.

The cut was the latest in an easing cycle started a year ago in August and came amidst inflation well under the central bank's 3% mid-term target.

 

The cut was the latest in an easing cycle started a year ago in August and came amidst inflation well under the central bank’s 3% mid-term target.

In a statement published after the decision was announced, the Council said there was still a “significant degree” of unused capacity in the economy and inflationary pressure was likely to “remain moderate over a sustained period”. Taking these factors into consideration, as well as perceptions of risk associated with the economy, the Council said “further cautious easing of monetary conditions may follow”.

“A sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for maneuver in monetary policy,” it added.

Explaining their decision on Tuesday to continue the easing cycle, the Council repeated several points they have made in previous months. These included 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.

The Council reduced the base rate by 25bp every month for twelve months until August, when they started making 20bp cuts.

 

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