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Hungary cuts base rate to record low, ends long easing cycle

AFP

Governor of the Hungarian Central Bank (MNB) Gyorgy Matolcsy during a press conference in Budapest on April 4, 2013Governor of the Hungarian Central Bank (MNB) Gyorgy Matolcsy during a press conference in Budapest on April 4, 2013

Governor of the Hungarian Central Bank (MNB) Gyorgy Matolcsy during a press conference in Budapest on April 4, 2013Governor of the Hungarian Central Bank (MNB) Gyorgy Matolcsy during a press conference in Budapest on April 4, 2013

Hungary's central bank MNB cut its main interest rate to a record low of 2.10 percent on Tuesday, ending a two-year-long monetary easing cycle aimed at stoking economic growth.

"The rate cut has brought the MNB's 490 basis point (4.9 percentage point) rate reduction cycle to an end," said a statement from the bank after the announcement.

"The base rate has reached the level which ensures both the medium-term inflation goal (of 3.0 percent) and continued economic growth," it added.

MNB governor Gyorgy Matolcsy later told journalists the loosening cycle -- begun in August 2012 when the rate was 7.0 percent -- was one of the "longest and deepest cuts in modern history".

Matolcsy said the monetary easing was both helped and made possible by a "turnaround" in Hungary's economy, the most indebted in emerging Europe.

The EU member rebounded strongly from its second recession in four years in 2013 and the government now thinks Hungary could beat its growth forecast of 2.3 percent this year.

Industrial output expanded at 9.6 percent in the year to May, official data showed.

Some analysts, however, say the economy is over-reliant on exports to the eurozone, in particular top economy Germany, and its auto production sector, powered by major Audi, Opel, Suzuki and Daimler plants.

Both the abrupt end of the cycle Tuesday and the 20-basis-point cut surprised analysts, who had expected a more conservative reduction from 2.30 percent.

Most, however, had predicted the cycle would eventually end at 2.10 percent.

The last time the bank's rate-setting Monetary Council made a 20 basis point cut was in December 2013.

- Optimistic outlook -

The news sent Hungary's currency, the forint, jumping to 309.7 against the euro, up from 309.1 just before the announcement.

The MNB argued that Hungary's record low inflation and what it called a "favourable" global risk environment had allowed the cut.

Twelve-month inflation, one of the highest in the EU in 2012, entered negative territory in April and dropped to -0.3 in June, mainly due to government-mandated energy price cuts and low food prices.

Matolcsy said the bank intends to hold the base rate at 2.1 percent until the end of 2015, unless its medium-term inflation target of 3.0 percent is at risk.

Matolcsy, a close ally of Prime Minister Viktor Orban and former economy minister in his government, forecast "subdued" inflation and "sustained" loose monetary policy.

Critics have argued he is too beholden to the government during an election year when the economy is a top priority.

Some analysts also questioned whether Hungary's economy -- which is still growing slower than most of its neighbours -- justified such optimism.

London-based research house Capital Economics said it expected the benchmark rate to remain at its current historic low "well into next year".

But Daniel Bebesy, an analyst with Budapest Fund Portfolio Manager, agreed with the MNB that the external climate was indeed favourable.

"Capital markets are not upset by the Ukrainian-Russian conflict, or the events in Gaza. There is hardly any volatility, and riskier assets remain popular," he told Hungarian news agency MTI.

Date created : 2014-07-22