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MNB aims for rapid base rate reduction

The Hungarian Central Bank (MNB) wants to cut rates as fast as possible because falling inflation and a recession warrant much lower rates, but rate cuts must not upset financial stability, MNB governor András Simor told Reuters.

“The Monetary Council has declared that we would like to lower the base rate as fast as possible because both real economy prospects and inflation prospects would justify a significantly lower interest rate level than the current level,” Simor said. “We can continue cutting rates only at a pace which, in our view, does not pose a threat to the stability of the banking system and capital flows.”

The MNB's monetary council has cut rates a combined 150bp in three steps since it announced a 300bp extraordinary rate rise at the end of October. The rate rise was intended to make an attack on the forint more costly for speculative investors.

Hungary's inflation rate is likely to fall well under the MNB's 3% mid-term target, Simor said.

“From an inflation perspective, I think the inflation target could even be achieved with a forint at 286 (versus the euro) which was the weakest the forint got to during the last three months,” he said.

The forint traded just under 267 to the euro early Tuesday morning.

Simor said the looming recession posed a risk to the budget, but he trusted the government would take additional measures if needed to cut the deficit to 2.6% of GDP, as planned.

“Risks on the revenue side of the budget have probably increased (since the November inflation report) as growth prospects have deteriorated,” Simor said.

The MNB governor added that due to a drop in the deficit and inflation, Hungary has moved closer to meeting the criteria of euro adoption, though he declined to say when a euro target date could be set.

“I said that in the first half of 2009 we will sit down with the government and we will talk about this (discussing euro introduction). What the outcome of this discussion will be, we will see then, I cannot say anything more,” Simor said. (MTI – Econews)