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MNB cuts base rate by 50 bps to 7.00%

The Monetary Council of the National Bank of Hungary (MNB) cut the central bank base rate by 50 bp to 7.00% at a meeting on Monday, bringing it to the lowest level in more than three years.

The rate cut was in line with market expectations.

In a statement published after the meeting, the Council said it believes that the Hungarian economy could return to a growth path in mid-2010. Although inflation has temporarily exceeded the mid-term inflation target due to the recent tax increases, it could be significantly lower than that in the second half of 2010. The international financial market climate has improved gradually in recent months in line with the better global economic outlook, however, the sustainability of the process remains questionable.

The consumer price figures of the past quarter has consistently remained below the expectations of the National Bank of Hungary. The moderate inflation rate, which remained so despite the indirect tax rises, is primarily due to the disciplinary power of declining demand. The Monetary Council believes that the risk has increased that inflation will significantly fall below the 3% inflation target in the medium term.

Labor market figures show that companies are adjusting to the weak domestic and foreign demand by reducing wage increases and by considerably staff cuts. A restrained wage policy is of key importance to maintaining the corporate sector's competitiveness. Wages set in line with the protracted recession and the prospective low-inflation climate will help preserve jobs and a speedier economic recovery.

The Hungarian economy's reliance on external resources can only be reduced substantially if the external balance improves steadily. The country continues to need a disciplined budget policy in order to gradually lessen its vulnerability. The achievement of this year's budget deficit target is partly ensured by measures whose long-term sustainability remains uncertain. This carries a risk already for the fulfillment of the 2010 budget, and could jeopardize the process of further budgetary consolidation.

Global risk-taking appetite has steadily and considerably increased in recent months, which has led to a fall in the yields expected from domestic financial instruments. However, the Hungarian economy remains vulnerable, which calls for an increasingly considerate monetary policy.

Considering inflationary and real economic processes, as well as the country's risk assessment, the Monetary Council decided to lower the base interest rate. A further interest rate cut can take place if it does not jeopardize the inflationary outlook and if it is permitted by the country's risk assessment. (MTI – Econews)