The National Bank of Hungary, which cut its base rate by a further 10 basis points to 2.40 percent, said it still believes that there is a degree on unused capacity in the economy and inflationary pressures are likely to remain moderate for an extended period.
In June the central bank will update its quarterly inflation report.
"The negative output gap is expected to close gradually at the policy horizon; however, achieving price stability in the medium term points in the direction of monetary easing," the bank said, adding that an improvement in the perceptions of the risk associated with Hungary's economy had provided scope for the latest "cautious reduction in interest rates."
The rate cut was largely expected by economists after a plunge in April inflation to a negative 0.1 percent following the government's third round of mandated price cuts for household energy.
The central bank has now cut rates by a total of 460 basis points since embarking on an easing cycle in August 2012, including cuts totaling 60 points this year.
Last month the central bank also said an improvement in the perception of the risks of investing in Hungary had provided room for the rate cut.
But unlike last month, the central bank today omitted the phrase that the base rate had now approached a level that ensures price stability in the medium term.
The central bank has been steering a path between the need to cut rates to stimulate economic activity and still maintain rates that are high enough to entice global investors.
"In the council's judgment, a cautious approach to policy is warranted due to uncertainty in the global financial environment," the bank said.
Last week the central bank's governor, Gyorgy Matolcsy, an ally of Prime Minister Viktor Orban, said further small rate cuts were still possible, even beyond the 2.5 percent level that he had previous signaled as the floor in the current easing cycle.
Although the exchange rate of Hungary's forint currency has strengthened in the last four months and a decline in external debt has reduced its vulnerability to changes in investors' sentiment, the central bank is clearly concerned that financial markets could turn their back on Hungarian assets if volatility returns.
"Global investor sentiment has been supportive in the past month, but future developments are surrounded by uncertainty due to the ongoing conflict between Ukraine and Russia," it said.
Hungary's economy expanded by 1.1 percent in the first quarter from the fourth quarter of 2013 for year-on-year growth in Gross Domestic Product of 3.5 percent, up from 2.7 percent and the fourth consecutive quarter of accelerating growth.
The central bank expects growth to pick up further in the quarters ahead with domestic demand making an increasing contribution to growth.
In its March outlook, the bank forecast 2014 growth of 2.1 percent and 2.5 percent for 2015, up from 1.1 percent in 2013.
"While the pace of economic activity is strengthening, output remains below potential and is likely to approach that level in the course of next year," the bank said.
In March the central bank said it 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 in 2015.
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