Central bank of Hungary cut interest rates ahead of Fed, ECB hikes
ALBAWABA – The central bank of Hungary cut interest rates Tuesday to ease pressure on its economy after three quarters of recession, news agencies reported.
The National Bank of Hungary cut the overnight deposit rate by a full percentage point to 16 percent, matching the estimate of economists surveyed in a Bloomberg poll.
The base interest rate become a secondary facility in October 2022, when the bank introduced an emergency monetary regime to curtail the slide of the forint. It was kept at 13 percent as Bloomberg expected.
Policymakers are walking a fine line between their drive to cut interest rates and their goal to rein in inflation, which slowed for a fourth consecutive month in May, though still above 20 percent.
Both the central bank and the government have forecast an inflation rate below 10 percent by December, according to previous official statements.
“In the current environment, a cautious and gradual approach is warranted” in monetary policy, the central bank said in a statement.
“If the improvement in risk perceptions persists, the Bank will continue the gradual convergence of the interest rate conditions of one-day tenders to the base rate.”
The yield on the 10-year government bond fell 8 basis points to 7.26 percent after the rate cut.
Meanwhile, the European Central Bank is slated to convene soon after the United States (US) Federal Reserve (Fed) concludes their July meeting, to discuss European borrowing rates.
Why did Hungary cut interest rates?
Hungary cut interest rates to lower borrowing costs to compete with the rest of the European Union (EU) and attract business into Hungary, in a bid to boost economic growth. As well as to boost demand and domestic consumption.
This is the third consecutive move to help relieve pressure on businesses and households, which have cut back on spending and exacerbated the economic downturn.
For Hungary, that outweighs the risk that lower rate cuts in Hungary may halt the deceleration of the EU’s highest inflation, which slowed to 20.1 percent in June, as reported by Bloomberg.
Notably, inflation in the EU peaked at above 25 percent in January.
The forint, meanwhile, has recovered after falling as much as 4 percent in the aftermath of last month’s rate decision, cutting into its gains this year.
The currency appreciated 0.3 percent to 372.4 against the euro. The forint has seen the best performance among 23 emerging-market currencies after the Philippine peso Tuesday, Bloomberg reported.
It has gained 7 percent against the euro this year and has traded in a tighter range since the May rate cut, which was the first in three years.
