Hungary cut its key interest rate for the first time in three years as it begins to dismantle an emergency monetary regime that halted a forint selloff and helped rein in runaway inflation.
(Bloomberg) — Hungary cut its key interest rate for the first time in three years as it begins to dismantle an emergency monetary regime that halted a forint selloff and helped rein in runaway inflation.
The central bank lowered its overnight interest rate by a full percentage point to 17%, Governor Gyorgy Matolcsy announced during an online briefing on Tuesday. The move matched the median expectation in a Bloomberg survey. The central bank also kept its base interest rate at 13%.
Scaling back the European Union’s highest borrowing costs — put in place since last October to prop up the plunging forint — may reduce economic headwinds that have helped fuel a recession while raising the risk of renewed currency depreciation.
“The persistent improvement in risk perceptions has enabled the Bank to take additional steps towards the normalization of the interest rate environment,” the central bank said in a statement.
Policymakers said they would continue rate cuts in a “gradual” manner while ensuring that the key rate would exceed inflation by year-end.
The forint, which dropped as much as 0.9% against the euro earlier in the day, the most among 23 emerging market currencies tracked by Bloomberg, steadied later in the day and was unchanged after the rate cut.
The forint has gained 6.9% this year, making it one of the best-performing currencies globally. Last week it weakened 1.4% after Foreign Minister Peter Szijjarto said Hungary could block EU financial aid to Ukraine.
Traders then said those comments may escalate a standoff over billions of euros of EU assistance earmarked for Hungary that the European Commission has frozen over corruption and rule-of-law concerns.
Risks remain. While the central bank forecasts a brisker pace of disinflation going forward, inflation at 24% in April was still close to its peak at the start of the year and was “unacceptably high,” Matolcsy said.
He said the government’s price caps — currently on basic food staples and earlier on fuel as well — had made price-growth a much bigger problem in Hungary than elsewhere, adding they needed to be phased out.
–With assistance from Barbara Sladkowska and Patrick Donahue.
(Updates with statement in fourth paragraph, governor’s comments throughout.)
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