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Monetary Council cuts MNB base rate by 50bp

The Monetary Council of the National Bank of Hungary (NBH) cut the central bank base rate by 50bp to 8.00% at a meeting on Monday.

At a press conference following the meeting, NBH governor Andras Simor said the proposal to cut the base rate 50bp was supported by an “overwhelming majority” of Council members. The other proposal was for a 75bp rate cut, he added.

MTI learnt that eight of the nine Council members were present at the meeting, including Mr Simor and the bank's two deputy-governors.

The rate cut was in line with market expectations. It followed a bigger-than-expected 100bp reduction at the Council's previous rate-setting meeting on July 27. That cut brought the base rate back to a level before an emergency 300bp rise - designed to make an attack on the forint more expensive for speculative investors - made on October 22.

The condensed minutes of the July 27 meeting show Council members saw room for a significantly lower rate by the end of the year, but views varied on the timing of cuts.

“Monetary policy may be eased further if it does not pose a threat to the inflation outlook and if assessments of risk allow it,” the Council said in a statement published after the meeting on Monday.

The Council acknowledged stabilizing, though still uncertain, global and domestic economies, adding that Hungary's economy was expected to start growing again in 2010. Inflation is likely to rise over the 3% mid-term “price stability” target because of tax hikes, but fall well under the target in the second half of 2010.

“The series of inflation shocks potentially resulting in an increase in economic agents' longer-term inflation expectations poses the greatest risk to the longer-term outlook for inflation. However, domestic demand has fallen to an extent that, apart from the effects of the tax changes, a low inflation environment can be expected even taking into account that risk,” the Council said.

The Council noted that the effect of falling domestic demand on the shrinking economy was bigger than expected. The outlook for employment and incomes, coupled with tightening credit conditions, prompted households to increase savings. As a result of adjustment in the private sector, the external financing requirement declined markedly.

The substantial decline in the external financing requirement and the resumption of government borrowing directly from the bond market contributed to an easing of concerns about the country's external financing, the Council said. Over the past month, however, international investor sentiment and risk assessments associated with the Hungarian economy have not changed after the significant improvement in previous months.

The condensed minutes from the Monday meeting will be published at 2pm on September 16. (MTI-ECONEWS)