Hungary still sees room for further rate cuts

    Hungary's central bank, which earlier today cut its policy rate for the 16th time in a row, said "considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy, further cautious easing of policy may follow."
    The guidance by the National Bank of Hungary is similar to the bank's statement in October, signaling that the central bank is likely to cut rates further.
    The central bank cut its base rate by another 20 basis points to 3.20 percent and has now cut rates by 255 basis points this year and by 380 points since August 2012 when it embarked on its current easing cycle to revive economic growth amid weak inflation.
    "In the council's judgement, there remains a significant degree of unused capacity in the economy and inflationary pressures are likely to remain moderate over a sustained period," the bank said, adding that a "further reduction in interest rates is consistent with meeting the 3% inflation target  in the medium term."
    However, the bank also tempered its outlook, noting that global financial markets continue to be volatile and a "sustained and marked shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy."
    Hungary's inflation rate fell to 0.9 percent in October from 1.4 percent in September, well below the bank's 3.0 percent target.
    The central bank said the low rate of inflation since the beginning of the year reflects the "disinflationary impact of weak domestic demand and the external environment" and expects inflationary pressures to remain moderate over the medium term as the low inflation environment also anchors inflation expectations.
    Hungary's economy is starting to strengthen and the central bank expects the expansion to continue this year and accelerate next year.
    But the level of output is still below potential and unemployment exceeds its long-term level which means that domestic demand is expected to remain weak, holding back inflation.
    Hungary's Gross Domestic Product expanded by an annual 1.7 percent in the third quarter and last week the OECD revised upwards its growth forecast for this year to 1.2 percent from a previous 0.5 percent and for 2014 growth to 2.0 percent from 1.3 percent. In 2012 Hungary's economy shrank by 1.7 percent.
    The international financial environment has been volatile recently, the bank said, due to the future outlook for monitor policy by major central banks and this has led to a slight deterioration in the perceptions of risks from investing in Hungary's economy along with a new wave of capital outflows form emerging markets.
    "In the council's judgement, the global financial environment remains supporting overall, but volatile sentiment in global financial markets continues to pose a risk, which in turn calls for maintaining a cautious approach to policy," the central bank said.

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