Hungarian Central Bank Cuts Key Rate Less Than Expected

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Monday, Hungary's central bank lowered its key interest rate by 25 basis points, surprising markets which expected a 50 basis points reduction.

The Magyar Nemzeti Bank lowered its base rate to 6.25% from 6.50% to bring stability in the economy in a volatile environment and to contain inflation which currently stays above the central bank's target. Thus, it matched the level last seen in June 2006. The central bank has made a total reduction of 375 basis points in seven occasions this year, including the latest cut.

Following the announcement, the Hungarian forint rose to a 5-day high of 190.59 against the US dollar by 8.05 am ET, up 1.3% from Friday's close of 193.05. The dollar-forint pair moved on holding pattern thereafter.

The decision to cut the rate by a small amount signals that the central bank may end its monetary policy easing earlier than many economists thought. But according to Capital Economics, there is a good case for further monetary easing over the coming months. "We continue to think that the profile for interest rates priced into the market is too high," economists at the London-based research group said. They noted that market expectations for the key rate to rise to 6.5% in the second half of 2010 is unlikely to materialize given the uncertainty in the real economy.

Inflation rose to 5.2% in November from 4.7% in October, well above the central bank's medium term target of 3%. Meanwhile, core inflation stood at 4.8%, slightly down from 4.9% recorded in October. The central bank sees inflation at 4.2% this year and at 3.9% in 2010.

The economy contracted 1.8% sequentially in the third quarter, slightly slower than a 1.9% drop recorded in the second quarter. The central bank expects that the economy would contract 6.7% this year before a weak recovery of 0.6% next year.

As a result of a series of interest rate cuts and other stimulus measures, some sections of the Hungarian economy recently showed some signs of stabilization. Monday, independent economic think tank GKI said economic sentiment for Hungary improved in December as both consumer and business confidence brightened. The fall in industrial output eased in October and there were improvements in trade.

Hungary's central bank lowered interest rate at a time when other central banks have started pushing their key rates higher as economies show signs of recovery from the global economic crisis. Norway's central bank hiked key interest rate by 25 basis points to 1.75% in December for a second straight rate-setting session. The Norges bank was the first central bank in Europe to hike rates after the crisis. In Asia, Australia hiked its key rate.

Monday, Hungary's central bank lowered its key interest rate by 25 basis points, surprising markets which expected a 50 basis points reduction. (Market News Provided by RTTNews)