UPDATE 2-Hungary cuts rates to new low, easing bias weakens

Tue Apr 29, 2014 12:10pm EDT

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(Updates with post-meeting statement, adds analyst comment, market reaction)

* Bank cuts main rate by 10 bps to new low of 2.5 pct

* Decision in line with expectations, forint stronger

* Rates have come down 4.5 pct points from mid-2012 peak

* Economic, risk outlook to influence next move

BUDAPEST, April 29 (Reuters) - Hungary's central bank cut interest rates to a record low on Tuesday but stopped short of giving the clear signal many analysts had expected that it was ending an aggressive easing cycle after 21 monthly cuts.

The bank lowered its base rate by 10 basis points to 2.5 percent in a widely anticipated move, bringing rates 4.5 percentage points below their mid-2012 peak when it launched its campaign to help government efforts to boost the economy.

Before the decision, the bank - packed with members appointed under recently re-elected Prime Minister Viktor Orban including Governor Gyorgy Matolcsy, his former economy minister - had signalled rate cuts could end at this level.

In a statement the bank said a slight improvement in Hungary's risk assessment provided room for Tuesday's rate cut, adding that the economic outlook and risk perception would influence the "direction and magnitude" of the next rate move.

Market blowouts have forced Hungary, central Europe's most indebted state, into sharp rate rises several times over the past decade.

The forint plumbed two-year lows last month and analysts say a plan by Hungary to stop foreigners using a central bank facility to park their money, seeking to push them into forint government debt instead, could keep it under pressure.

Two of the bank's nine rate-setters have been calling for a halt to easing for months. But Tuesday's statement contained no explicit reference that the cycle, which brought the benchmark on a par with that in regional heavyweight Poland, had ended.

Instead, the Monetary Council repeated its March wording, saying: "The base rate has significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the real economy.

"Over the coming period, changes in the domestic and international environment might influence this picture."

OPTIONS OPEN

At 1442 GMT, the forint traded at 308.25 to the euro, somewhat stronger than 308.80 before the rate cut as some investors took the reference to the "direction" of the next rate move as a signal that the reductions may be over.

The bank's policy path has been smoothed by government cuts in household energy bills that have quelled inflation, as well as monetary stimulus from the U.S. Federal Reserve and other major central banks that has triggered a flood of cheap money into emerging markets like Hungary.

One analyst said Tuesday's statement indicated that the bank wanted to keep its options open in case a favourable shift in market or inflation trends allowed room for a further trim.

"I think they did not want to say definitively that yes, we will cut rates further but did not want to rule it out either. It will be decided on a case-by-case basis," said analyst Zsolt Kondrat at MKB Bank.

"But the easing bias that used to be there is missing," he said. "It seems now they feel that this is already okay, but there could be such a favourable scenario that they cut more."

Inflation was just 0.1 percent in March, although the central bank expects it to rise to its 3 percent target next year.

"Inflationary pressures in the economy are likely to remain moderate over the medium term and inflation is likely to move into line with the medium-term inflation target from 2015," the central bank said.

It noted the standoff between Ukraine and Russia was keeping emerging market investors nervous but expressed confidence about Hungary's ability to finance itself.

Even so, cutting rates too far could add to the risk a sell-off. About half of analysts polled by Reuters expect the central bank to begin raising interest rates late this year. (Reporting by Gergely Szakacs; Editing by John Stonestreet/Ruth Pitchford)

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