Hungary's central bank, which earlier today cut its base rate for the 21st time in a row, said the "slight improvement in risk perceptions associated with the economy provided room for a cautions reduction in interest rates."
The National Bank of Hungary, which cut its base rate by a further 10 basis points to 2.50 percent, repeated its guidance from March that the base rate had now approached a level that ensures price stability in the medium term and support for the economy.
But it added today that "over the coming period, changes in the domestic and international environment might influence this picture," signaling that the bank now considers rates to be broadly neutral and future policy changes will depend on incoming data.
The central bank has cut its rate by a total of 450 basis points since embarking on an easing cycle in August 2012, including cuts totaling 50 basis points this year.
The central bank's council said economic growth is likely to continue and while the pace of economic activity is strengthening, output remains below potential and is likely to return to close to that level during the next year.
"Inflationary pressures in the economy are likely to remain moderate over the medium term and inflation is likely to move into line with the medium-term inflation target from 2015," the bank said.
Hungary's inflation rate was unchanged at 0.1 percent in March and February and the central bank expects inflation to remain below its 3.0 percent target this year at an average rate of 0.7 percent before rising toward the target next year.
The central bank said inflationary pressures remained moderate due to weak domestic demand and low inflation in other countries, but the rate of private sector wage growth had started to pick up and the disinflationary pressures from the demand side should weaken as activity gathers pace.
Hungary's economy fell into recession in 2012 but growth started to rebound last year and the central bank said monthly data on industrial output, retail sales and construction show that economic growth is continuing and expected to pick up gradually in the quarters ahead, with domestic demand likely to make a increasing contribution.
Gross Domestic Product expanded by 0.5 percent in the fourth quarter of 2013 from the third quarter for annual growth of 2.7 percent, up from 1.8 percent in the previous quarter.
In March the central bank forecast 2014 growth of 2.1 percent and 2.5 percent for 2015, up from 1.1 percent in 2013.
Although sentiment among global investors was volatile in the past month due to the escalation of the conflict between Ukraine and Russia, the central bank said risk premia for Hungary fell slightly and the forint current strengthened.
But the country still relies on external financing and "in the council's judgement, a cautious approach to policy is warranted due to uncertainty related to the global financial environment," the bank said.
Hungary's forint has been depreciating against the euro since the middle of 2012 and fell by 2 percent in 2013 and has continued to fall this year. Today it was quoted at 309.28 to the euro, down 3.9 percent this year.
Last week the central bank changed its main instrument for managing liquidity in an attempt to reduce the country's external debt by motivating banks to hold more forint-denominated government debt as deposits with the bank will no longer be accepted as collateral against loans.
From Aug. 1, the bank's two-week bill will be replaced by a two-week deposit facility and the central bank is hoping that up to 1 trillion forints, including 600-800 billion held by foreign banks, would be swapped into government debt and out of two-week deposits.
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