Hungary’s central bank cuts rates

Hungary’s central bank on Monday cut interest rates for the fifth consecutive month in an effort to spur a recovery from a deep recession.

The Magyar Nemzeti Bank slashed the closely-watched two-week deposit rate by 50 basis points to 6.5 per cent,its lowest level in more than three years.

The cut was broadly expected and adds to a total of 3 percentage points in monetary easing since July.

Global central banks are beginning to unwind emergency liquidity measures and countries including Norway, Israel and Australia have raised interest rates in recent weeks.

However, Hungary remains behind the curve owing to a previous need to defend its currency.

Hungary suffered a severe downturn as a result of the economic crisis and in October 2008 became the first European Union state to receive a bailout from the International Monetary Fund.

Budapest turned to the IMF, World Bank and the EU for a €20bn credit line after its interbank and sovereign debt markets froze up.

The economy has stabilised somewhat in recent months as global risk appetite and sentiment has improved.

The forint has appreciated by around 18 per cent against the euro since March, providing breathing space for rate cuts.

Nevertheless, the government is forecasting that the economy will contract by 6.7 per cent this year, the biggest decline since the aftermath of the fall of the Iron Curtain.

The government of Gordon Bajnai , prime minister, is targeting a budget deficit of 3.9 per cent this year as part of an austerity programme agreed with the IMF .

Peter Oszko, finance minister, said last week that these austerity measures would provide the central bank with leeway to ease monetary policy.

However, an OECD report warned that the potential for further monetary easing was "constrained by global risk appetite and the budget outcome ahead of general elections in 2010".

Mr Bajnai’s government is expected to cede power to opposition party Fidesz next year, with markets concerned about potential effects on Budapest’s fiscal consolidation efforts.

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