The National Bank of Hungary's rate-setting Monetary Council decided to continue an easing cycle at a meeting on Tuesday, reducing the central bank's key rate by 25bp to 6.00%.
The 25bp cut - the fourth one in a row - was in line with market expectations. At the previous three monthly rate-setting meetings, the Council's three internal members wanted to keep rates on hold in light of high inflation, but they were outvoted by the four external members, who argued inflation was contained and lower borrowing costs would support economic growth.
Speaking at a press conference after the meeting, governor András Simor said the Council voted on two options: one to keep the rate on hold and the other to cut it by 25bp. The latter proposal was supported by a "narrow majority", he said. In a statement released after the meeting, the Council said that the cut was justified by the inflationary outlook, improved sentiment on financial markets and the disinflationary effect of weak domestic demand.
"Expected developments in inflation and financial markets as well as persistently weak demand warrant a lower interest rate level," the Council said.
"The Council will consider a further reduction in interest rates if data becoming available in the coming months confirm that the improvement in financial market sentiment continues and the medium-term outlook for inflation remains consistent with the 3% target," it added.
The Council said the central bank's 3% mid-term inflation target can be met in 2014. Costs shocks "have no adverse effect" on the medium-term outlook for inflation because of the "substantial margin" of spare capacity in the economy, it explained. The disinflationary impact of weak domestic demand will dominate as the impact of cost shocks wane, it added.
The Council also noted that the favourable global financial market environment, together with the government's strong commitment to maintain a low fiscal deficit, could contribute to a sustained decline in risk premia on domestic financial assets.