Central bank cut the base rate by 50bp to 9.50%
As expected, the central bank cut the base rate by 50bp to 9.50% at its today’s rate setting meeting. The statement of the council indicated that the inflation would remain well below the mid-term target and the prospects of the real economy had further deteriorated. The decline in the industrial output was bigger than expected, suggesting weaker external demand. The deeper than expected recession could lead to even lower inflation rate. Apart from the inflation and recession factors, the monetary policy has to focus on the financial stability and must ensure the continuity in capital flows. According to the council, risks around the external financing have mitigated in the recent period, but the council still has narrow room of maneuvering. The added, however, that as the state of financial markets allows, the base rate would be cut further.
The press conference has been held by the Vice Governor Karvalits, at which he said that the council discussed three options: a 50bp cut, a 75bp cut and 100bp reduction in the base rate. Most members voted for a cut of 50bp. The recession factor has also been mentioned at the press conference, as well. Karvalits suggested that the GDP forecasts would be revised downwards in the next Inflation Report (scheduled for February). (In the November report, the staff projected a GDP decline of 0.2-1.7% y/y for 2009).
As for the forint exchange rate, Karvalits said that the depreciation of the forint has not been so significant to have strong impact on the inflation outlook or financial stability and that the council examines long term trend, instead of short term movements. As for the market rumors, regarding an FX swap agreement with the Swiss National Bank, in order to provide Swiss franc liquidity for the markets, Karvalits said that conditions are being worked out. However, the spokesman of the Swiss National Bank said to Reuters this afternoon that the SNB has reached an agreement with Hungary's central bank to swap Swiss francs for euros, though the fine detail has still to be decided. Nevertheless, the agreement could mitigate tensions in the local banking system around the Swiss franc liquidity, and could make the CB base rate more effective.
As for the base rate outlook, after today’s decision we do not change our current forecast. The base rate could be reduced to 8.50% by the end of March and could stand at 7% at the end of the year.
