By Margit Feher
BUDAPEST--Bringing its easing cycle to a full two years,
Hungary's central bank cut Tuesday its main interest rate deeper
than expected to a new record low to help the government propel the
recovery.
Following the inflation index's even deeper dip into negative
territory in June, the National Bank of Hungary cut its policy rate
to 2.10%, from 2.30%, more than expected.
The decision to cut the main rate by one fifth of a percentage
point was out of line with the near-unanimous expectation of the 19
economists polled by The Wall Street Journal for a 0.10
percentage-point cut. The cut was the 24th consecutive rate cut
since August 2012, when the main rate was at 7.00%.
Deputy Governor Adam Balog said earlier this month that there
was room for one or two more rate cuts to reach the inflation
target. The bank's fellow Deputy Governor Ferenc Gerhardt said that
the end of the easing cycle is near and the main rate shouldn't go
beyond 2.00%.
With its two-year rate-cut cycle Hungary "seem to ignore the
possibility of falling risk appetite, even though the country
remains one of the most vulnerable in central Europe due to its
high refinancing needs," warned UniCredit economist Dan Bucsa.
Hungary "has been testing the limits of monetary easing, and
spot inflation at these levels is unlikely to deter further rate
cuts," said economist Gautam Kalani at Deutsche Bank prior to the
move.
Headline inflation was negative on the year over the past three
months as against the 3% medium-term inflation target. Pushed lower
by falling food prices, it was -0.3% on the year in June versus
-0.1% in the previous two months. Risk sentiment on financial
markets, meanwhile, didn't deteriorate, supporting Tuesday's rate
cut.
But core inflation, a measure of price growth excluding volatile
energy and food prices, continued to linger around 2.5% in June,
indicating that headline inflation is set to increase back to 3% by
end-2015.
Hence the Hungarian central bank will have to increase its
policy rate back to 3.50% by December 2015 from the anticipated
2.00% bottom, UBS economist Gyorgy Kovacs said.
"A key risk to our rate call is that earlier rate hikes might be
necessary if the normalization of U.S. monetary policy and a
stronger dollar start to put pressure on the Hungarian forint,
given the still very high share of local-currency debt owned by
non-resident investors," Mr. Kovacs added.
At over 80% of gross domestic product, Hungary's public debt is
the highest in central Europe, and strong growth may help the
country reduce that. Hungary's growth, while unexpectedly robust at
a rise of 3.5% on the year in the first three months of the year,
is forecast by most analysts to slow in the coming quarters.
Comments last week from central banker Gyorgy Kocziszky
highlighted the bank's policy dilemma of how to buoy growth in
light of persistent spare capacities while inflation is low once
rate-cutting as a tool has been exhausted.
"At what level the low level of interest rate may be maintained
for an extended period is a much more exciting issue than whether
the policy rate may come down by five or 10 basis points. The other
issue is what other means [than rates] are there at hand for the
central bank to support the government's economic policy," Mr.
Kocziszky said.
Write to Margit Feher at margit.feher@wsj.com