The Hungarian central bank (MNB) very surprisingly decided to cut its key policy rate by 50bp to 11.00% at its monetary council meeting today. Both we and most other market participants had expected unchanged policy rates. In its new inflation report, published together with the interest rate announcement, the MNB sees inflation (CPI) averaging 3.1-3.4% in 2009 versus 4.1% previously, and 1.5-1.9% in 2010 versus 3.0% previously. In addition, the MNB sees 2009 GDP contracting by 0.2-1.7% versus 2.6% GDP growth in its previous report, while GDP growth in 2010 is forecast at 0.5-2.0% compared to 3.4% previously.
In our view, today's rate cut is not only surprising, but also somewhat reckless given the significant pressure seen recently on the Hungarian forint (HUF). Note that the MNB hiked its key policy rate on October 22 by 300bp in a move to stabilise the forint
