Hungary's central bank cuts benchmark by 20 points to 3.8%

The rate-setting Monetary Council of the National Bank of Hungary cut the benchmark two-week deposit rate by 20 base points to 3.8 percent on Tuesday, marking the thirteenth straight monthly reduction. While the 3.8 percent marks a record low rate, the amount of the cut was slightly less than the earlier decreases of 25 base points or a quarter of a percent each, since this one was only 20 base points or a fifth of a percent. Since central bank governor Gyorgy Matolcsy announced at a news conference a month ago that the Monetary Council would continue to cut rates albeit in smaller steps, the lower rate cut was anticipated. However, most analysts predicted that it might be as small as 10 base points or one-tenth of a percent. An official statement issued by the bank cites continued low inflation, partly due to low demand. The year-on-year inflation rate was 1.8 percent in July, also kept in check by government-mandated cuts in electric power and gas rates taking effect in January of this year. It also states its anticipation that the economy could grow, noting that output continues to be low and the unemployment rate is still high. Given that the medium-term inflation target is 3 percent, said the statement, the bank feels justified in maintaining a more relaxed monetary policy although its position could change if the global financial environment becomes more volatile. The local currency, the forint, continued to weaken against the euro following the announcement, dropping to 300.60/euro from the pre-announcement 299.90. The forint is now 225.40 against the dollar. However, the currency has been weakening steadily since the Hungarian government announced in mid-July that it was seeking a way to phase out foreign currency household mortgages, which have played havoc with borrowers since the forint began its downward slide back in 2008, so the influence of the rate cut is unclear.