Hungary’s central bank cuts key interest rate to 5.25 percent, another all-time low

Hungary’s key interest rate cut to 5.25 percent

BUDAPEST, Hungary — Hungary’s central bank cut its main interest rate by a quarter point to a new all-time low of 5.25 percent on Monday, continuing its run of monetary easing as inflation appears under control and financial investors more confident in the country’s stability.

The rate reduction, to take effect April 27, was in step with market expectations and was the tenth consecutive cut since July 2009.

“Hungarian growth is likely to resume this year as the economy recovers from the sharp downturn of 2009,” the National Bank of Hungary said in a statement on its rate decision. “Inflation is expected to fall below the bank’s target next year, reflecting the effect of weak domestic demand. There remains considerable uncertainty about future conditions in global financial markets.”

Hungary’s economy shrunk by 6.3 percent last year and the central bank’s expectations are for growth of around 0.2 percent in 2010 and 3.4 percent in 2011.

“Exports are expected to pick up, in contrast to domestic demand, which is unlikely to grow materially this year. In consequence, the recovery in the domestic economy is likely to lag behind that in the global economy and the countries of Central and Eastern Europe,” the bank said.

Analysts said that while food prices have risen more than expected recently, domestic demand remained weak and the central bank’s medium-range inflation target of 3 percent was still attainable, making room for the rate cut.

The central bank issued a similar assessment, saying that the rate-setting Monetary Council “continues to judge that inflation may begin to fall back towards the target from the middle of this year and then dip below it next year.”

Hungary’s currency has strengthened against the euro and yields on government bonds have fallen, partly because of the sweeping election win by the center-right Fidesz party, factors which support monetary policy easing.

Future rate cuts, however, will depend on the next government’s fiscal plans and how much larger the budget deficit will be in 2010. It is now planned for 3.8 percent of Hungary’s gross domestic product.

“Fiscal policies constitute the major political risk now as excessive loosening would prove inconsistent with further monetary policy easing,” said a report from research firm 4Cast in London.

Incoming Prime Minister Viktor Orban said Monday that his administration would present an economic program to the International Monetary Fund, which led a late 2008 aid package of euro20 billion ($27 billion) and helped Hungary avoid defaulting on its debts.

“We will negotiate but the aim of this negotiation will not be to listen to dictates and tame them through skilled mediation,” Orban told reporters. “Our task is to have an economic plan for which we can obtain support from those who recently have taken on the financing of the country.”

The central bank last cut rates on March 30, to 5.25 percent from 5.50 percent.