The National Bank of Hungary’s (NBH) Monetary Council voted to lower the base rate by 25 basis points to 6.25 percent at a rate-setting meeting on Monday.
Most analysts had expected a 50 basis point rate cut, especially after twelve-month gross wages dropped in October, for the first time since January, but higher yields and a weaker forint in the wake of recent downgrades of sovereign issuers of debt may have given Council members pause.
The bank has reduced rates by a combined 325 basis point at each of its monthly meetings since July. International investor sentiment and assessments of risks associated with Hungarian financial assets have both been very volatile over the recent period, NBH said in a statement on Monday, explaining the decision.
Even if justified by the outlook for inflation and the economy, interest rates may only be reduced further if changes in perceptions of risks associated with the economy allow it, NBH said.
In order to reduce Hungary’s high government debt and vulnerability to external shocks, it is particularly important to maintain a disciplined, long-term sustainable fiscal policy, NBH emphasized in its Monday release.
In the Council’s judgment, Hungarian growth is likely to resume in the middle of 2010 as the economy recovers from this year’s sharp downturn. Inflation is expected to remain elevated temporarily due to the tax increases, and then to move materially below the central bank’s 3 percent medium-term target in the second half of 2010, NBH said.