(Bloomberg) — Hungary lowered the highest key interest rate in the European Union by a full percentage point as policymakers try to combat the country’s longest recession since at least 1995.
(Bloomberg) — Hungary lowered the highest key interest rate in the European Union by a full percentage point as policymakers try to combat the country’s longest recession since at least 1995.
The central bank decreased its overnight interest rate to 14% on Tuesday, matching all forecasts in a Bloomberg survey. The move brought the instrument, which was made the key rate in October to stem a plunge in the forint, one step away from the benchmark rate, which was kept unchanged at 13% in a separate decision.
The central bank plans to simplify its monetary-policy toolkit after the convergence of the two instruments, Deputy Governor Barnabas Virag said in an online briefing, without giving a detailed plan. While economists have already forecast the alignment of the two main rates next month, Virag said that investors shouldn’t assume that rate cuts will automatically continue at the same pace after that.
“Monetary policy doesn’t work on autopilot,” Virag said, adding that decisions would be “data-driven” and will be “cautious and gradual” in approach.
The forint held on to its gains after the rate decision, strengthening 0.5% against the euro and boosting its year-to-date gain to 4.7% against the common currency.
Hungary’s economy has contracted for four consecutive quarters as consumers and companies struggle with the EU’s fastest inflation and highest borrowing costs, which have depressed consumption and production.
As annual inflation slowed from a peak of more than 25%, the central bank began normalizing its monetary policy in May by cutting its 18% key rate in 100-basis-point monthly steps. The main interest rate levels may drop to 11% by year-end, according to the median forecast in a Bloomberg survey.
While disinflation is broad-based, it’s lagging and slower in the retail sector and therefore warrants caution, Virag said. The central bank and the government forecast that the annual inflation rate will drop to single-digit territory in the fourth quarter. The latest print was for July, when it dipped to 17.6%, the first time in 11 months that it was below 20%.
(Updates with guidance in third paragraph, comment in fourth, inflation in last.)
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