Hungary cuts rate 11th time but caution now warranted

    Hungary's central bank cut its base rate for the 11th time in a row, as expected, and expects to continue to reduce rates due to moderate inflationary pressure but the bank signaled it may have to slow down the pace of easing as volatile financial markets may force it to be become more cautious.
    The National Bank of Hungary cut its rate by another 25 basis points to 4.25 percent, increasing the total reduction in rates since August to 275 basis points, with rates cut by 150 basis points in 2013 alone.
    The central bank's monetary council said there was still "a significant degree of spare capacity in the economy, inflationary pressures are likely to remain moderate in the medium term, and therefore the 3 percent target can be me with looser monetary conditions."
    "However, the global financial environment has been volatile recently," the bank said, adding "a sustained and market shift in perception of the risks associated with the economy may influence room for manoeuvre in monetary policy. The council judges that as long as the outlook for inflation and the real economy justifies it, interest rates can be reduced further; however, increased caution in warranted in the volatile and rapidly changing global environment."

     So far, sentiment in global markets have remained supportive of Hungary, the bank said, but uncertainty has increased recently.
    The central bank said it expected inflation to ease further in the short term, mainly due to falls in administered prices and commodity prices, and the disinflationary impact of weak domestic demand.
    In May, Hungary's inflation rate rose to 1.8 percent from 1.7 percent in April.
    "Overall, inflationary pressures are likely to remain moderate over the medium term," it said.
    Recent economic data suggest that domestic demand and slack in labour markets are affecting expectations and the tax-adjusted inflation rate is expected to remain below 3 percent.
    The output from Hungary's economy is likely to return to its previous level only gradually, it added.
    In the first quarter, Hungary's Gross Domestic Product grew by 0.7 percent from the previous quarter but on an annual basis the economy contracted by 0.9 percent, the fifth quarterly contraction in a row.

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