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MNB could cut rates but should be cautious

National Bank of Hungary (MNB) deputy governor Ferenc Karvalits sees room for further rate cuts but said the bank must proceed with caution as financial markets are still unstable.

Speaking on news radio station Inforádio late on Thursday, Karvalits said that inflation is likely to fall to 2%-2.5%, well below the 3% inflation target, by the second half of 2010 as recession dampens domestic demand. Recession and the inflation outlook make a monetary easing not only possible but also necessary, Karvalits, who is also a member of the rate-setting Monetary Council, said. Markets are still unstable, however, and therefore the bank must reconsider its step thoroughly each time, he said.

The MNB cut the key Hungarian base rate by 100bp in July and by another 50bp in August, bringing the rate to 8.00%. The cuts were the first since the end of January.

The IMF loan serves as a security buffer, and not as additional resources, Karvalits said. Hungary wants to extend the availability of the remaining two tranches of the IMF standby credit by six to nine months from the original March 2010 deadline, he added.

The IMF, the EU and the World Bank approved a combined EUR 20 billion credit to Hungary after its bond market locked up in the autumn. An IMF delegation is currently in Hungary for a scheduled quarterly review. (MTI-Econews)