Hungary cuts base rate to record low of 2.1%

Tuesday 22 July 2014 15.59
The rate cut has brought the MNB's 4.9 percentage point rate reduction cycle to an end
The rate cut has brought the MNB's 4.9 percentage point rate reduction cycle to an end

Hungary's central bank MNB cut its main interest rate to a record low of 2.1%, and announced the end of a two-year-long monetary easing cycle aimed at stoking economic growth.

"The rate cut has brought the MNB's 4.9 percentage point rate reduction cycle from 7% August 2012 to an end," a statement from the bank read after the announcement.

"The base rate has reached the level which ensures both the medium-term inflation goal of 3.0% and continued economic growth," it added.

MNB governor Gyorgy Matolcsy later told journalists it was one of the "longest and deepest cuts in modern history". 

Mr Matolcsy said the lengthy easing cycle was made possible by a "turnaround" in Hungary's economic fortunes, which he said was in large part due to the monetary easing.

In 2012, the EU member suffered its second recession in four years but rebounded strongly last year.

Both the abrupt end of the cycle and the 0.2 percentage point cut surprised analysts who had expected a more conservative reduction from the previous 2.3% level, although most predicted an eventual end to the cycle at 2.1%.

The last time the bank's rate-setting Monetary Council made a 0.2 percentage point cut was in December 2013, after which it switched to a 0.15 percentage point pace in January 2014 and to 0.1 percentage points from March this year. 

The MNB argued in recent months that Hungary's low inflation and what it called a "favourable" global risk environment allowed for the continuation of the easing strategy.

Annual inflation entered negative territory in April and dropped to -0.3% in June, the lowest ever recorded, mainly on the back of ongoing government-mandated household energy price cuts begun in 2013 as well as low food prices.

Core inflation however has been rising leading most analysts to even forecast interest rate hikes in the medium-term.

Mr Matolcsy said that the MNB intends to hold the base rate at 2.1% until the end of 2015, unless the bank's medium-term inflation target of 3.0% comes under risk.