Hungary council reduces base rate to 4½% as inflation slows sharply

By Tali David

Minneapolis, May 29 - The Monetary Council of the Magyar Nemzeti Bank voted to reduce its central base rate by 25 basis points to 4½% from 4¾% at its meeting on Tuesday, according to a press release.

The council of the Hungarian central bank said that economic growth is likely to resume this year following last year's recession. The level of output remains below its potential, and unemployment exceeds its long-term level determined by structural factors. The council expects weak demand conditions to persist, which will ensure that inflationary pressures in the economy remain muted in the period ahead.

Inflation slowed sharply in April, partly related to developments in the prices of non-core items. Recent trends in underlying inflation continue to reflect the strong downward pressure of weak domestic demand on prices.

The council believes that incoming economic data suggest that weak demand continues to exert a strong disinflationary impact on prices, and therefore companies have limited ability to pass on higher production costs into prices, while they are making stronger adjustment through the labor market.

The outlook for inflation and the real economy point to a reduction in interest rates.

The council said it will consider a further reduction in the policy rate if the medium-term outlook for inflation remains in line with the bank's 3% target and the improvement in financial market sentiment is sustained.

The abridged minutes of the council meeting will be published on June 12.

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