The building of the NBH in Budapest – Photo: wikimedia

Central bank cuts base rate by 50 basis points

Hungarian central bank (NBH) rate-setters cut the base rate by 50 basis points to 7.75 percent at a regular policy meeting on Tuesday.

The Council also decided to lower the symmetric interest rate corridor in tandem, bringing the O/N deposit rate to 6.75 percent and the O/N collateralised loan rate to 8.75 percent.

At the previous policy meeting in March, the Council cut the base rate by 75 basis points to 8.25 percent.

“The outlook for inflation warrants further reduction in the base rate at a slower pace than earlier,” the Council said in a statement released after the meeting. “The volatile risk environment continues to warrant a careful and patient approach to monetary policy,” the policy makers added.

The Council noted that the slower pace was in line with the start of a “new phase” in April and said any further reductions in the base rate would be taken “in a data-driven manner”.

At a press conference after the meeting, NBH deputy governor Barnabas Virag said the slower pace of easing was justified by the inflation outlook and increasing risk aversion. The volatile risk environment requires a “careful and patient” approach to monetary policy, he added.

He pointed to “strong and broad-based” disinflation, but said market services were “falling slowly” from a high level, a development the Council was following with “special attention”.

He said that preserving financial market stability “remained a priority”.

Virag noted that slowly dropping service price inflation was a general trend in the global economy.

He acknowledged the positive impact on Hungary’s risk assessment of historically high international reserves and an improving current-account balance, but said worsening international sentiment had driven risk premia on Hungarian assets higher in the recent period.

Fielding questions about the base rate horizon, Virag said there was “no place to rush”, adding that policy makers would take decisions “from month to month” that were appropriate based on the freshest macro data and global financial market assessments.

He said that inflation could rise temporarily from the middle of the year and that policy makers would have to weigh policy decisions “very cautiously” in the second half of the year, when room for further rate cuts could be “very limited, based on information available at present”.

He said the 50-bp cut was the only option discussed at the meeting and the decision on the reduction was unanimous.

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