National Bank of Hungary Cuts Benchmark Rate

Portfolio Hungary:

The National Bank of Hungary (NBH) has on Monday reduced the base rate by 25 basis points to 7.75%, while the consensus forecast of analysts in a Portfolio.hu poll last week showed that the Monetary Council will leave rates on hold, as it did in the past seven months.

Bloomberg also covers the story here.

The decision seems to have taken many observers by surprise given the continuing inflation Hungary is experiencing. My feeling is that they aren't giving as much importance to the recent wages data as many expected them to, while the recent drop in retail sales (which may mean that the domestic economy is slowing faster than anticipated) and the upward pressure on the Forint (which is of course counter-productive when Hungary badly needs to export) may have been major considerations. Basically if you want a soft landing you have to give *some* support to internal demand, and get exports up. There is no easy path here.

The inflation rate fell for a second month in May as the effect of the austerity measures wanes. It was 8.5 percent, compared with 8.8 percent in April and a six-year high of 9 percent in March. Annual core inflation was at 5.7 percent, from 5.9 percent in April.

The bank aims to cut the inflation rate to 3 percent within the next two years. It last month raised its average 2008 inflation forecast to 3.6 percent from 3.4 percent, citing higher energy prices, and said it expects to meet its target in the first quarter of 2009.