Hungary’s central bank cuts key interest rate to 6 percent, lowest since Sept 2005

Hungary’s key interest rate cut to 6 percent

BUDAPEST, Hungary — The National Bank of Hungary on Monday cut its main interest rate by a quarter percentage point to 6 percent, its lowest since September 2005.

The rate cut, to take effect Jan. 26, was in line with analysts’ expectations, who saw the central bank weighing positive developments in Hungary’s inflation rate against risks posed by external factors such as high debt levels in Greece and Ireland.

The central bank said interest rates could be cut only by a quarter point because of the uncertainty on international markets — which could affect Hungary because of its high indebtedness and its vulnerability to external shocks.

National Bank of Hungary President Andras Simor said a “convincing majority” in the monetary council voted for the quarter point cut, while the other possibility would have been a cut of half a percentage point.

Still, the 6 percent interest rate matches Hungary’s lowest rate since the 1990 end of communism — the country also had a 6 percent interest rate between September 2005 and June 2006.

While higher taxes imposed by the government last year resulted in higher inflation in 2009, the central bank’s monetary council said it expected inflation to be “considerably” below its target of 3 percent within the next year or two.

The bank also highlighted Hungary’s improving current account, affected both by slowly improving foreign demand and the continuing deterioration of domestic demand.

“Because of the persistently weak domestic demand, there will be a delay in the recovery of the Hungarian economy compared to developed countries and the region,” the bank said in a statement explaining the rate cut.

Further cuts will be possible only when Hungary’s risk assessment improves, the bank said.

Hungary’s parliamentary elections in April are also considered a risk factor, while rising exports could lead to a positive revision of the government’s target of a 0.6 percent economic contraction in 2010.

The national currency, the forint, has been one of the most affected by the global financial crisis, but a tight fiscal policy over the past months has helped improve prospects.