Hungarian Central Bank Cuts Interest Rate

Hungary's central bank have just cut their benchmark interest rate for a second time this year. The rate-setting Monetary Council, led by bank President Andras Simor, cut the two-week deposit rate by a quarter of a percentage point to 7.5 percent after having left it unchanged since June.

Hungarian inflation, which is the European Union's second-fastest after Latvia, has slowed ever so slightly of late, after reaching a six-year high in March. In fact the annual inflation rate fell to 8.3 percent in August from 8.4 percent the month before, reaching the lowest level since January 2007. The central bank last month said it expects the pace of price increases to slow further.The Banks is rather caught at the moment in a deep sea between the rock of falling domestic demand and the hard place of having 80% of the outstanding mortgages in swiss francs, and thus needing to defend the forint. Stubborn inflation would occuply the middle ground in this panorama. According to the Bank press statement:

"Our 3 percent inflation target is attainable in 2009, if the increase in agricultural, food and energy prices doesn't lead to second-round effects... the bank....expects inflation to gradually moderate in the next two years. The Monetary Council sees room to lower the benchmark rate."

Forward-rate agreements show that investors have already stepped up their expectations of rate cuts in the next five months. They now expect more than 50 basis points, compared with less than 25 basis points a month ago. We must now wait and see what effect all of this has on the forint.