Hungary's central bank cut its base rate by 20 basis points to 3.0 percent, its 17th rate cut in a row, and said "further easing of monetary policy may follow, but a reduction in the increment is likely to be warranted in the future" in light of stronger economic growth and a possible rise in financial markets' view of the risk of investing in the country.
But the National Bank of Hungary, which has cut rates by 275 basis points this year and 400 points since August 2012, is clearly approaching the end of its easing cycle and aware that cutting rates too much could make international investors nervous and lead to an outflow of capital.
"A marked and sustained shift in perceptions of the risks associated with the Hungarian economy may influence the room for manoeuvre in monetary policy," the bank said.
Hungary, like many other emerging market countries, saw capital flow out and their currencies decline earlier this year when the U.S. Federal Reserve first raised the possibility of a tapering of its asset purchases, and the central bank is concerned this may re-occur once the decision to taper is taken.
But at this point financial markets appear comfortable investing in Hungarian assets and the central bank said the rate cut was "justified by the low inflation environment, subdued inflationary pressures over the medium term and a degree of spare capacity in the economy."
"On the whole, the global financial environment has been supportive in the past quarter. However, sentiment has been volatile, due to uncertainty about the future of unconventional measures used by global central banks, which warranted an even more cautious approach to domestic monetary policy," the bank said.
Hungary's forint has risen about 1.0 percent this month and rose further today on the central bank's decision to 298.8 to the euro, but is down 2.6 percent since the start of the year, a relatively low fall compared with some other emerging market currencies, such as Indonesia and India's currencies.
Hungary's inflation rate stabilized in November at 0.9 percent, the same as in October, and the central bank expects inflationary pressures to remain muted in the medium term due to weak domestic demand and low international inflation before gradually moving toward the bank's 3.0 percent target.
"Looking forward, loose labour market conditions and the adjustment of inflation expectations are likely to lead to moderate wage growth, which in turn may contribute to the maintenance of the low inflation environment," the bank said.
Hungary's economy has been picking up speed in recent months and the central bank said rising exports were likely to play an important role as a source of growth while domestic demand was also expected to strengthen in coming years though household consumption is likely to grow only gradually despite higher incomes.
"Propensity to save is expected to remain high, reflecting the ongoing reduction in debt built up during the years prior to the crises and the slow improvement in credit conditions," the bank said.
Hungary's Gross Domestic Product grew by 0.9 percent in the third quarter from the second for annual growth of 1.8 percent, the second quarter of positive growth after the economy shrank for five consecutive quarters from the start of 2012 to the second quarter of this year.
Last month the OECD raised its growth outlook for Hungary to 1.2 percent for 2013 and to 2.0 percent for 2.0 percent. In 2012 the economy shrank by 1.7 percent.
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