UPDATE 2-Hungary cuts official interest rates for 23rd month running

Tue Jun 24, 2014 11:31am EDT

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(Adds statement, inflation report, background)

* Central bank cuts rates by 10 bps to 2.3 pct, as expected

* Price dips, ECB policy shift have created room for easing

* Bank cuts inflation forecasts, may cut rates even further

By Marton Dunai and Sandor Peto

BUDAPEST, June 24 (Reuters) - Hungary's central bank cut its main interest rate to a record low of 2.3 percent on Tuesday and said rates may still have not reached the bottom after cuts in each of the past 23 months.

The 10 basis point reduction in the base rate was forecast by all 18 analysts polled by Reuters last week.

Low inflation figures and continuing monetary easing by the European Central Bank have kept other central banks in the region focussed on supporting economic recovery, but with most official rates already at record lows, analysts see little scope for more cuts.

Even so, Hungary's central bank said it may cut rates further.

Inflationary pressures in the Hungarian economy are likely to remain moderate and the macroeconomic outlook points towards "persistently loose monetary conditions", its rate-setting Monetary Council said in a statement.

"Considering the outlook for inflation and taking into account perceptions of the risks associated with the economy and the pick-up in economic growth, further cautious easing of monetary policy may follow," the Council said.

The bank cut its average inflation forecasts to zero for this year from 0.7 percent and to 2.5 percent for 2015 from 3 percent in its quarterly inflation report on Tuesday. It sees inflation lower even though it revised its economic growth projection to 2.9 percent for 2014 from 2.1 percent.

Economy Minister Mihaly Varga earlier told Reuters in an interview that economic growth could exceed 2.5 percent this year unless the conflict between Ukraine and Russia escalated and hit key industries.

Hungary's benchmark rate has fallen from a peak of 7 percent in August 2012 as its monetary policy council, appointed under Prime Minister Viktor Orban, moved into line with his campaign to revive the economy.

"The very low base rate carries significant financial stability risks as Hungary is very sensitive to the forint exchange rate because its external debt remains high...," Erste Bank analyst Gergely Gabler said in a note.

Wobbles in other emerging markets early this year knocked down the forint to 2-year lows against the euro but it has rebounded as investors' appetite grew for risky assets including high-yielding bonds in the European Union's peripheries.

The forint eased 0.2 percent against the euro even before the rate cut, but stayed in the past months' ranges, and Hungarian government bond prices firmed, with their yields dropping by about 5 basis points.

KEEPING FAITH

Hungary now has the second-lowest interest rate among central Europe's non-euro zone countries, even as it looks to roll over the region's highest debt pile with a "junk" credit rating, which might make it vulnerable to market shocks.

It has had to hike interest rates sharply several times over the past decade to contain market blowouts.

But the market seems to be retaining faith in the Hungarian economy, with the country's CDS spread - the cost of insuring against a default - falling sharply this year.

Last week Hungary's 5-year CDS spread hit its lowest since the 2008 onset of the global financial crisis, based on Reuters data. It fell to 151 basis points from an all-time high of 627 at the end of 2011.

The easing cycle has been supported by a massive U.S. monetary stimulus programme and by the ECB's campaign to fight off the risk of Japan-like deflation.

Cheap money pumped out by major central banks encourages investors to seek higher returns in riskier asset markets like Hungary's.

($1 = 224.63 Hungarian Forints) (Reporting by Budapest editorial, writing by Marton Dunai and Sandor Peto; editing by John Stonestreet/Ruth Pitchford)

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