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18 Feb 2014
Hungary further cuts rates in bid to unfreeze economy
FXStreet (London) - The Hungarian central bank showed today that it has not finished with its easing cycle that began in August 2012. The latest 15bps cut takes the benchmark interest rate set by the Magyar Nemzeti Bank from 7 percent at the beginning of its cycle to a current 2.7 percent.
The rate cut went further than expectations of a 10bps drop, and comes after the forint hit a two-year low against the dollar. The aggressive approach from the Hungarian central bank has been driven by concerns over retreating investor demand for emerging market economies as the US Federal Reserve scales back its asset purchases.
Though the central bank remains dovish in its outlook, there was some change in language accompanying the rate cut. “Further cautious easing may follow,” was replaced by “will decide on the need and possibility for continuing the easing cycle”. However projections for Hungarian inflation remain benign, with the central bank stating that it sees “a significant degree of unused capacity in the economy”.
While Turkey has drastically hiked rates in an attempt to slow lira depreciation, the Hungarian central bank has argued that, unlike Turkey and others who have run a current account deficit which places them at greater risk in tightening conditions, Hungary’s current account puts it in a much stronger position. The central bank argues that its flatlining inflation (albeit largely as a result of state directed utility price controls) gives it space to ease monetary policy.
In addition to the 430 bps of headline interest rate cuts carried out over 19 consecutive months by the Hungarian central bank, it has also mooted a HUF2.75trillion/USD12.2bn credit facility in a bid to prop up private lending and stimulate growth.
The rate cut went further than expectations of a 10bps drop, and comes after the forint hit a two-year low against the dollar. The aggressive approach from the Hungarian central bank has been driven by concerns over retreating investor demand for emerging market economies as the US Federal Reserve scales back its asset purchases.
Though the central bank remains dovish in its outlook, there was some change in language accompanying the rate cut. “Further cautious easing may follow,” was replaced by “will decide on the need and possibility for continuing the easing cycle”. However projections for Hungarian inflation remain benign, with the central bank stating that it sees “a significant degree of unused capacity in the economy”.
While Turkey has drastically hiked rates in an attempt to slow lira depreciation, the Hungarian central bank has argued that, unlike Turkey and others who have run a current account deficit which places them at greater risk in tightening conditions, Hungary’s current account puts it in a much stronger position. The central bank argues that its flatlining inflation (albeit largely as a result of state directed utility price controls) gives it space to ease monetary policy.
In addition to the 430 bps of headline interest rate cuts carried out over 19 consecutive months by the Hungarian central bank, it has also mooted a HUF2.75trillion/USD12.2bn credit facility in a bid to prop up private lending and stimulate growth.