* Central bank cuts rates by 15 basis points to 2.85 pct
* Policymakers have said rates could fall as low as 2.5 pct
* December inflation sank to 43-year low of 0.4 pct, seen
* Analysts see rates bottoming out at 2.7 pct - Reuters poll
By Gergely Szakacs
BUDAPEST, Jan 21 Hungary's central bank cut its
main interest rate by 15 basis points to a new low of 2.85
percent on Tuesday, trimming the scale of its recent cuts
and suggesting the bank may be nearing the bottom of a long,
steady rate-cutting cycle.
The bank's Monetary Council, all appointed under Prime
Minister Viktor Orban's government, cut rates again despite the
forint's modest weakening as inflation hangs at 43-year lows and
the cost of insuring Hungarian debt against default is near a
The council may also have been encouraged to cut rates below
3 percent, where it has previously suggested it may end its run
of rate cuts, by the benign market reaction to the U.S. Federal
Reserve's move to start reducing its monetary stimulus.
Tuesday's cut was slightly larger than most analysts had
expected in a Jan. 13-16 Reuters poll. Sixteen of 20 analysts
forecast a 10 basis-point cut, while four had predicted another
20 basis-point reduction. No one had 15 basis
points pencilled in.
In all, the panel has now reduced rates by 4.15 percentage
points from their August 2012 peak, and the bank led by Orban
ally Gyorgy Matolcsy has also launched an up to $12.3 billion
stimulus programme to boost the economy.
Orban, who says he has saved Hungary from a Greek-style
collapse since taking office four years ago, will fight for
re-election in April.
The central bank's long run of rate reductions may help his
efforts to drag Hungary's economy out of a prolonged malaise.
The forint has eased 1.4 percent against the
euro since the December rate meeting, trading on the weaker side
of the psychologically key 300 level. At 1308 GMT, it traded at
302.65 compared with 302.80 before the rate decision.
Central bank Deputy Governor Adam Balog told Reuters in an
interview early this month that rates could go as low as 2.5
percent, matching the rate in regional heavyweight Poland, which
has a stronger economy and an investment-grade credit rating.
Most analysts say rates are likely to bottom out at 2.7
percent, but their expectations have shifted lower and lower in
recent months as the bank sought to guide market expectations.
"Our baseline scenario envisages that the MC will continue
lowering the policy rate by 10 bps each month, with a view to
reaching 2.5 percent and then keeping it unchanged for the rest
of 2014," said analyst Gergely Hudecz at Credit Suisse.
"The MC might tolerate a gradual weakening of the forint's
exchange rate, but it could end the easing cycle earlier if the
forint depreciates sharply versus the euro, in our view," Hudecz
Further ahead, analysts polled by Reuters expect the bank to
begin raising rates around the end of this year as central banks
in developed markets consider tightening policy and investors
start to expect higher yields.
Central bankers have said the forint factors in their
outlook on rates only to the extent that it influences price
developments. They have also said they would not react to
gradual and orderly shifts in the exchange rate.
Hungary covered most of its foreign currency borrowing needs
for the first half of 2014 with a $2 billion dollar bond issue
in November. Domestic debt tenders remain well-bid and five-year
credit default swap levels are near four-year-lows.
A plunge in inflation to a 43-year-low of 0.4 percent in
December, largely due to government-imposed cuts in household
energy prices and a decline in food prices, has also given the
bank room to cut rates steadily.
The bank expects inflation to remain below its 3 percent
medium-term target both this year and next.
Close trade links with the euro zone's recovering economies
have shielded central European currencies from the wobbles seen
in other emerging markets in recent months, while Hungary's
current account surplus adds to the forint's stability.
By contrast, Turkey's lira hit a new record low after its
central bank kept rates on hold on Tuesday, as the market had
expected substantial rate hikes to defend the currency and fight
But some analysts say more rate cuts could hurt the
"Continued interest rate easing and populist measures in
Hungary are likely to further undermine HUF over the coming
months," said analyst Phoenix Kalen at Societe Generale.
($1 = 222.68 Hungarian forints)
(Editing by Hugh Lawson)