Hungary’s central bank cuts key interest rate to 5.75 percent, its lowest ever

Hungary’s key interest rate cut to record low

BUDAPEST, Hungary — The National Bank of Hungary on Monday cut its main interest rate by a quarter percentage point to 5.75 percent, its lowest level ever, to help the economy out of the economic downturn.

The cut, to take effect Feb. 23, was in line with analysts’ expectations, many of whom also believe the central bank would now stay on hold for some time — since July 2009 it has lowered rates at eight consecutive meetings.

Analysts say external factors like market uncertainty caused by Greece’s fiscal problems and expectations that the United States will also soon have higher interest rates are likely to slow or halt Hungary’s rate cuts.

On the domestic side, risk factors include Hungary’s parliamentary elections in April and a chance that inflation will be higher than expected.

The bank’s “rhetoric is clearly getting more and more cautious, a pause is to come soon,” said analyst Gabor Ambrus at 4Cast in London.

The central bank said higher inflation over the past three months could be attributed mostly to noncore factors, such as oil prices, while services prices continued to fall.

“Taking all these factors into account … inflation may fall below the target over the next two years, albeit at a somewhat slower pace than earlier expected,” the bank’s Monetary Council said after the rate cut announcement.

The central bank also noted that risks to Hungary’s economy were little changed despite the weakening of investor sentiment due to Greece’s debt crisis.

“The significant improvement of Hungary’s external balance has reduced the vulnerability of the economy,” the bank said. “However, the high level of debt and weak indicators of economic activity continue to pose risks.”

The central bank also released fresh predictions for Hungary’s inflation and growth rates. Consumer prices are now expected to rise by 4.4 percent in 2010 and 2.3 percent in 2011 — up from earlier forecasts of 3.9 percent and 1.9 percent. The central bank’s medium-term inflation target is 3 percent.

On growth, the central bank confirmed the finance ministry’s recent revision for a forecast of 0.2 percent contraction in 2010 — compared to earlier expectations of a 0.6 percent fall — and economic growth of 3.4 percent in 2011.

With exports rising and domestic demand continuing to fall, Hungary’s current account has been showing a “substantial surplus” since mid-2009, which the bank sees continuing in the medium term.

“The council therefore expects the economy to operate without reliance of foreign funding in coming years,” the bank said.

Analysts said that an upcoming reduction to seven from nine members in the NBH’s monetary council also would make rate cuts less likely, as the two departing members, Ilona Hardy and Vilmos Bihari, were considered to be among the more “dovish” economists, favoring rate cuts.

“Their departure could mean a relative majority for those preferring monetary tightening,” said a report from Equilor Investment Ltd. in Budapest.