The Monetary Council of the National Bank of Hungary (NBH) cut the central bank base rate by 50bp to 7.50pc at a meeting on Monday.
The rate cut was in line with market expectations.
In a statement published after the meeting, the Council said Hungary’s economy could return to the growth path in the second half of 2010. Inflation will temporarily rise over the mid-term “price-stability” target of 3pc because of tax rises, but will fall under the target in the second half of 2010. Global financial markets stabilised over the past month, but the risk of new shocks cannot be overlooked.
The outlook for mid-term inflation is good, because falling demand has limited price rises by businesses, the Council said. Companies passed on only a part of the VAT rise at the start of July because of the low demand. However, inflationary expectations, resulting from a series of inflation shocks, pose a further risk.
Hungary’s external balance has improved markedly as a result of the crisis and because of a disciplined fiscal policy, the Council said. But the non-structural changes in the government’s budget-balancing measures make the sustainability of the improvement doubtful.
Adaptability of the labour market has been slightly worse than expected, the Council said. Wages were high compared to the performance of the economy in the past several months. Long-term price stability cannot be created if real wages rises continuously exceed the productivity growth, members warned.
Tax cuts to come into force from 2010 will allow employers and unions to agree on wage rises that are appropriate in light of increases in productivity and the inflation outlook. Holding back on wage rises could improve the profitability of companies, contributing to job preservation and a speedy recovery.
The condensed minutes of the meeting will be published at 2:00pm on October 7.
The rate cut followed another 50bp rate cut at a meeting on August 24 and a bigger-than-expected 100bp reduction at a meeting on July 27 that brought the base rate back to a level before an emergency 300bp rise — designed to make an attack on the forint more expensive for speculative investors — made on October 22. The rate-setters voted 7:1 for the 50bp rate cut at the meeting in August. Just one Council member voted for a 75bp cut.
NBH governor Andras Simor said at a conference at the weekend that inflation would have allowed for bigger rate cuts in the past months, but rate-setters held back because of worries about the country’s risk assessment.
“We were apprehensive about the country’s financial stability, we were apprehensive about the country’s ability to get financing, so we did not make bigger rate reductions,” Mr Simor said.