Hungary cuts by 25 bp

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Hungary’s central bank made its 12th consecutive interest rate cut on Tuesday, trimming its policy rate from 4.25 to 4 per cent a year, a record low. The move was widely expected.

Gyorgy Matolcsy, central bank governor, was due to speak after the decision to give guidance on the future direction of policy. A short note issued with the decision suggested the bank’s easing cycle may be coming to an end. More on this later.

Hungary’s move is in contrast with Turkey’s rate increase on Tuesday, when it raised its overnight rate by 75 basis points. Both countries are struggling to get their economies going again. The difference is that Turkey has a big problem with its current account deficit, so to cut rates would risk weakening its currency and letting that problem inflate out of control.

Hungary is in the comfortable position of having a current account surplus, so it can focus on growth. But it must keep an close eye on its accounts. It cannot risk erosion of its surplus; and while cutting rates should in theory reduce the government’s debt burden, it could equally have the opposite effect, as about 44 per cent of public debt was denominated in foreign currencies at the end of the first quarter – making Hungary’s problem similar in a round-about way to Turkey’s.

[This post has been corrected to show that 44 per cent of public debt was denominated in foreign currencies at the end of Q1 2013, and not 80 per cent as previously stated.]

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