Hungary has room to reduce its benchmark interest rate from a record low as policy makers seek to bolster the economy emerging from a recession, Magyar Nemzeti Bank President Gyorgy Matolcsy said.
“The easing cycle isn’t over, we see further scope for cutting the key interest rate,” Matolcsy said at a conference in Budapest today. Policy makers will take into consideration global financial market risks and the fate of stimulus programs, Matolcsy said.
The central bank lowered the benchmark two-week deposit rate to a record 4.25 percent on June 25 in an 11th consecutive quarter-point cut and said further easing is possible as long as the outlook for inflation and economy justify it. Still, policy makers pledged “increased caution” because of the market volatility caused by the U.S. Federal Reserve saying it may phase out stimulus.
Hungary may have to embark on “monetary tightening” if global risk appetite and a protracted recession in the euro area raise risk premiums on local assets “significantly,” the central bank said in a report today. On June 25, it lowered its inflation forecast and raised its projection for economic growth for this year.
Matolcsy, who took over in March, wants to help ignite an economy emerging from its second recession in four years with inflation at the slowest in almost 39 years. The scope to ease policy was threatened by an emerging-market selloff after Fed Chairman Ben S. Bernanke said last week the U.S. central bank may start slowing the pace of its unprecedented bond buying this year if the world’s biggest economy keeps improving.
The forint gained 0.4 percent to 295.15 per euro by 2:34 p.m. in Budapest, extending its second-quarter appreciation to 3.1 percent, the third-best performance among about 170 currencies tracked by Bloomberg.
The central bank this week cut its forecast for average inflation this year to 2.1 percent from 2.6 percent and raised its economic-growth estimate to 0.6 percent from 0.5 percent. Price growth will probably accelerate to 3.2 percent next year with expansion picking up to 1.5 percent, it said.
Policy makers complemented 2.75 percentage points of rate cuts since August with a 750 billion forint ($3.3 billion) program to boost lending to small and mid- sized companies.
The Funding for Growth program together with falling interest rates will “render Hungary’s financial system a lot cheaper,” Matolcsy said. Banks will have to reduce credit costs and start lending “in this new world,” Matolcsy said.
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