Hungary cuts interest rate from 6.50% to 6.25%

December 23rd, 2009 - Modest rate cut Hungary’s central bank


The Hungarian National Bank reduced its base rate by 25 basis points, which was less than the expected 50 basis points. Hungary’s central bank, Magyar Nemzeti Bank, cut its key interest rate from 6.50% to 6.25% in order to stabilize the economy as the circumstances are rather unstable and to control inflation , which is at the moment higher than the central bank’s target, matching the rate of June 2006. So far in 2009, the Hungarian National Bank has reduced the key interest rate by 375 basis points, including the recent reduction.

Hungarian National Bank
The Hungarian Forint climbed to the highest rate of 190.59 in 5 days versus the Greenback by 8.05 a.m. ET, which is a 1.3% rise in comparison to Friday’s closing rate of 193.05.
The lower than expected rate reduction implicates that the Hungarian National Bank could end its monetary easing sooner than experts had predicted. However, it’s likely that additional monetary measures will be taken in the next few months, according to Capital Economics. “We still believe that the conditions for interest rates priced into the market are too high,” Capital Economics declared. The market outlook for the base rate to climb to 6.5% in the third and fourth quarter of next year is not likely considering the volatility in the real economy.

Hungary’s economy
Hungarian inflation leaped from 4.7% in October to 5.2% in November, while the central bank medium term target is at 3%. In the meantime, core inflation declined slightly from 4.9% in October to 4.8% in November. The Magyar Nemzeti Bank estimates an inflation rate of 3.9% in 2010 and 4.2% in 2009. From July through September, the Hungarian economy shrank by 1.8%, as it contracted by 1.9% in the second quarter. Hungary’s economy will shrink by 6.7% in 2009, while it will contract by 0.6% in 2010, according to the Hungarian National Bank.

Improvement
Recently, several components of Hungary’s economy seemed to have become more stable, due to stimulus measures, such as a number of consecutive interest rate reductions. In December, economic conditions in Hungary improved due to a recovery in business and consumer confidence, according to GKI Economic Research. Trade recovered and the pessimistic situation of industrial output improved in October.