Hungary’s central bank cut its key interest rate by a full percentage point for a fifth month, ending an emergency monetary regime imposed last year to arrest a slump in the forint.
(Bloomberg) — Hungary’s central bank cut its key interest rate by a full percentage point for a fifth month, ending an emergency monetary regime imposed last year to arrest a slump in the forint.
The Monetary Council lowered the overnight deposit rate to 13% on Tuesday, matching the forecast of all economists in a Bloomberg survey. That’s on par with the level of the base rate, which is expected to resume being the effective key interest rate for the economy.
Investors’ focus now shifts to the central bank’s fresh inflation forecasts and the pace of rate cuts for the rest of the year after policymakers flagged last month that they would no longer be on “autopilot” from October. Deputy Governor Barnabas Virag will hold an online briefing starting at 3 p.m. in Budapest.
Inflation Outlook
The rate outlook was muddled when Governor Gyorgy Matolcsy said last week that he saw inflation slowing to about 7% by December, from a European Union-high 16.4% in August, triggering a weakening in the forint as investors stepped up bets that faster disinflation may widen the central bank’s room to cut rates.
“If the central bank wants to take back control from the market over rate expectations, it has to engineer a hawkish surprise in October,” Peter Virovacz, an economist at ING Bank Hungary, said by phone before the rate decision. He expects policymakers to slow the pace of rate cuts to 25 basis points a month in October and November.
The forint strengthened below 390 per euro on Tuesday in Budapest, snapping six days of losses. The forint had lost 1.9% of its value against the euro in the period, the second-worst performance among 23 emerging-market currencies after the Colombian peso.
Hungary’s government and central bank have clashed repeatedly over economic and monetary policy in the past week as each side seeks to blame the other for a yearlong recession and to take credit for disinflation.
Prime Minister Viktor Orban on Monday said his government had to “take over” the central bank’s role to slow price growth by setting a goal of taking inflation down to to below 10% by the end of the year. On Friday, Economic Development Minister Marton Nagy said there was a risk that an excessively cautious monetary policy would restrain an economic recovery.
A day earlier, Matolcsy rebuked Orban’s cabinet for fanning price-growth with pre-election spending, a regime of price caps on food staples that he blames for raising inflation, as well as a failure to rein in a record budget shortfall this year.
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