Hungarian central bank cuts key rate amid positive results

Hungary's central bank (MNB) cut its base rate by a quarter of a point to a record low of 4.50 percent on Tuesday amid strong economic results recently and with analysts predicting more cuts to come. This was the 10th monthly reduction in a row since an easing cycle began last August in a bid to stoke demand and investment and lift the country out of recession. The national currency the forint, which has been trading strongly against the euro recently, firmed further on the announcement although it slipped back later. Across central Europe and as far as Turkey, a central focus of attention for investors are the prospects for interest rates cuts as monetary policy is one of the few tools left to policymakers. "The (bank's rate-setting) Monetary Council has decided to lower the base interest rate by 25 basis points to 4.50 percent," the MNB said in a statement on its website. The cut, the third since Gyorgy Matolcsy -- a loyal ally of Prime Minister Viktor Orban -- took over as bank governor in March, was widely anticipated by economists owing to recent positive economic results. Hungary posted 1.7-percent growth in the first quarter of this year to exit a recession that began at the start of 2012, while inflation in April dropped to 1.7 percent, the lowest level since 1974. "The country's risk profile has improved. The outlook for inflation and the real economy both point towards interest rate cuts," the MNB said in a second statement Tuesday. "Further cuts in base rates could take place, if the medium-term inflation forecast remains under 3.0 percent, and the favourable conditions in financial markets remain," it added. Since Matolcsy's appointment, the MNB has said on several occasions that interest rate policy was a tool to help the economy grow. Orsolya Nyerste, an analyst at Erste Bank, told AFP that inflation should comfortably remain under 3.0 percent in 2013. "Given the positive external environment, it would have been a surprise if the rate had not been cut," she said. "The base interest rate could even fall to 4.0 percent by the end of July," she predicted, as long as the forint remained relatively strong and stable. The national currency has been strengthening in recent months. On Tuesday, the rate cut caused it to firm to 285.73 to the euro after the announcement at 1200 GMT, compared with 286.50 just before. This was its highest rate against the single currency since the end of last year, although it slid back to 286.63 by 1440 GMT. Budapest Bank (GE Group) analyst Peter Duronelly said the easing cycle will last as long as the wider external climate remains benign. "Hungarian interest rates are still among the highest in the world, while indicators such as inflation, the balance of trade, and the budget deficit all compare favourably in an international context," he said. Economists are also keenly awaiting a decision by the European Commission Wednesday on whether Hungary can exit the excessive deficit infringement procedure imposed by Brussels since the country entered the EU in 2004 -- a move which analysts believe could further strengthen the forint. London consultants Capital Economics warned however that Hungary's high level of mostly foreign-currency-denominated public debt -- which rose to 82.2 percent of gross domestic product in March from 79.2 percent at the end of 2012 -- was cause for caution. "We think the country's high level of foreign currency debt means that many commentators and the markets are overestimating the scope for policy easing," analyst William Jackson said in a bulletin Tuesday. "If anything, we think the National Bank could be forced to hike interest rates by the end of the year in order to shore up the forint," he added.