Hungary Signals Further Easing After Cutting Rate to Record

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Hungary’s central bank said it has more room to continue monetary easing after cutting the benchmark interest rate to a record in its fight to end eight months of deflation.

Policy makers lowered the two-week deposit rate to 1.65 percent from 1.8 percent on Tuesday, the third 15 basis-point cut in as many months. That matched the forecast of all 19 economists in a Bloomberg survey. “Cautious easing” may continue, the rate-setting Monetary Council said in a statement.

The downward march of Hungarian borrowing costs coincides with remarks last month by policy makers who said they wanted to give a “stronger signal” about their resolve to continue easing policy as long as necessary to help achieve their inflation target. They resumed lowering rates in March after a seven-month pause amid the deepest drop in consumer prices since the 1960s.

“The inflation outlook and the cyclical position of the economy point in the direction of a reduction in the policy rate and loose monetary conditions for an extended period,” the Monetary Council said on the central bank’s website. “Cautious easing of the policy rate may continue as long as it supports the achievement of the medium-term inflation target.”

Weaker Forint

The forint has weakened 3.2 percent against the euro since the central bank re-started its rate-cut cycle on March 24. That’s the biggest decline among its currency peers in the eastern European Union including Romania, the Czech Republic and Poland. It traded down 0.5 percent at 309.4 per euro at 3:52 p.m. in Budapest.

Hungary’s rate cuts mirror similar moves by central banks across the region as they try to ward off deflation. Romania unexpectedly cut its main rate by a quarter-point on May 6 to a record low 1.75 percent. Poland, where policy makers lowered borrowing costs in March, has maintained its rate at a record 1.5 percent. Czech central bankers kept the benchmark rate at 0.05 percent for a 20th meeting on May 7.

“The central bank is poised to cut the main rate to 1.5 percent next month, bringing Hungary’s benchmark rate in line with that of Poland,” Monika Kiss, an economist at Equilor Befektetesi Zrt. brokerage in Budapest, said in an e-mail. She predicts a holding pattern in July and August and a possible cut to 1.3 percent by year-end, depending on the inflation outlook.

Hungary continues to experience a “low inflation environment” and the inflation rate is forecast to approach policy makers’ 3 percent target “toward the end of the forecast period,” the Monetary Council said.

Consumer prices dropped 0.3 percent from a year earlier in April, the eighth month of decline. The slide slowed for a third month since hitting minus 1.4 percent in January.

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