Hungary cut its benchmark interest rate more than economists forecast after consumer prices fell by the most since 1968, as policy makers moved closer to ending Europe’s longest uninterrupted monetary-easing cycle.
The Monetary Council cut the two-week deposit rate to 2.1 percent from 2.3 percent. All 21 economists surveyed by Bloomberg saw a reduction to 2.2 percent. The bank will publish a statement at 3 p.m. in Budapest to explain its decision.
The central bank cut borrowing costs for the 24th consecutive month, bringing the main rate down from 7 percent in 2012 as subdued inflation widened policy room to help an economic recovery following a recession two years ago. Two central bank vice presidents in the past month said policy relaxation is nearing its end.
“We see not a single factor that could deter another reduction of the policy rate,” Mariann Trippon, an economist in Budapest at Intesa Sanpaolo SpA’s CIB Bank, said in a report before the rate decision.
The forint has weakened 3.9 percent against the euro this year, the worst performance among eastern members of the European Union that have yet to adopt the bloc’s common currency. The Hungarian currency traded at 309.75 per euro at 2:04 p.m. in Budapest.
Forward-rate agreements, used to wager on the three-month interest level in three months, fell to 2.18 percent from 2.3 percent a month ago. That compares with the 2.3 percent three-month Budapest Interbank Offered Rate, showing bets for rate cuts of at least 10 basis points in the next three months.
The central bank will stop its easing cycle before the main rate reaches 2 percent, Vice President Ferenc Gerhardt said in a Portfolio.hu interview on July 10. The bank may push though “one or two reductions,” which would allow it to meet its “primary goal,” Vice President Adam Balog said in a July 11 interview with the Vs.hu website.
The central bank targets an inflation rate of 3 percent in the medium term. Consumer prices fell 0.3 percent in June as government-regulated household energy costs and food prices fell. The central bank forecasts an average inflation rate of zero in 2014 and 2.5 percent in 2015, with economic growth of 2.9 percent and 2.5 percent, respectively.
The inflation and growth outlook justify “persistently loose monetary conditions,” the rate-setting Monetary Council said after last month’s rate decision, suggesting that policy makers aren’t planning on tightening monetary policy based on domestic economic data.
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