NBH cuts key rate by 20bp

Matolcsy György

The National Bank of Hungary’s Monetary Council decided at a meeting to reduce the central bank’s key rate by 20bp to 3.20pc, as expected by the market. Rate-setters said they still saw room for further cautious rate reduction.With the cut, the rate-setters continued an easing cycle started in August 2012. Concluding a statement published after the decision was announced the Council said that “in the current environment monetary policy can support reaching the 3pc midterm inflation target through loose monetary conditions”. Hungarian twelve-month CPI dropped below the midterm inflation target on a government-initiated cut in utilities prices in February, and fell to 0.9pc, an almost 40-year low, in October. The statement of the rate-setters repeated the assessment of the previous few months, saying there was still a “significant degree” of unused capacity in the economy and inflationary pressure was likely to “remain moderate over a sustained period”. Taking inflationary and real economy prospects into consideration, as well as perceptions of country risk, the Council said “further cautious easing of monetary conditions may follow”. “A sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy,” it added. Hungary’s risk assessment slightly deteriorated in the past month, but the international financial environment “remained on the whole, supportive”, the statement said. Explaining Tuesday’s rate cut, the Council said that although economic activity is picking up, it is still below its potential level, and unemployment was decreasing, but was still above the long-term trend. Rate-setters expect continued weak domestic demand, citing the limited increase in wages and the expected limited and gradual pass-through of higher production costs on to consumers. The Council also noted low imported inflation, and said that the NBH’s inflation gauges, used to indicate middle-term prospects, hardly changed from the lows reached in the previous few months. The Council cut the base rate by 25bp at each of its monthly rate-setting meetings for twelve months from the beginning of the cycle until last August, when it started making 20bp reductions. NBH governor Gyorgy Matolcsy said in an interview last week that the central bank could continue its easing cycle as long as the rate of inflation continues to fall. “When the rate of inflation comes down, we can follow the decreasing inflation track. If it stops, we have to stop. But, as far as the rate of inflation is concerned we still see the room to manoeuvre with regard to the base rate,” he told CNBC.