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Monday, Hungary's central bank lowered its key policy rate by a quarter point to a record low to boost the economy that is struggling to exit recession.
The Magyar Nemzeti Bank cut the rate by 25 basis points to 5.75% from 6.00%. The decision was in line with economists' expectations. Including the latest cut, the central bank has made a total reduction of 375 basis points since July last year.
Overnight central bank deposit rate was lowered to 4.75% and the rate on overnight collateralized loan reduced to 6.75%. The interest rate remunerated on required reserves was cut to 5.75% and the penalty interest rate applied in case of reserve deficit to 5.75%. New rates will be effective from February 23.
"We expect rates to remain at record lows over the next eighteen months or so. By contrast, the market is pricing in small hikes later this year," economists at Capital Economics said. "The timing of future interest rate cuts will be dictated by fluctuations in investor confidence."
Earlier in the day, results of a survey carried out by independent economic think tank GKI showed that Hungary's economic sentiment improved further in February. Business sentiment also improved in the month.
The economy contracted for a seventh consecutive quarter in the final three months of 2009. Gross domestic product fell 0.4% sequentially in the fourth quarter.
With domestic demand still facing significant headwinds, any recovery will have to be driven by the export sector, Capital Economics said. With Eurozone growth already faltering, Hungary's the prospects for a strong rebound look slim, economists said. Eurozone remains the country's key export market.
Consumer price inflation accelerated to 6.4% in January from 5.6% in December, more than double the central bank's medium term target of 3%.
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