Hungary cuts key interest rate to 5 pct

[March 27, 2013]  BUDAPEST, Hungary (AP) -- Hungary's central bank on Tuesday cut its key interest rate to an all-time low of 5 percent, the first reduction since a new president took the helm.

The National Bank of Hungary's quarter-point reduction, which takes effect on Wednesday, was the eighth consecutive monthly cut but the first since Gyorgy Matolcsy, the former economy minister, took over as the bank's president earlier this month.

As minister, Matolcsy introduced a series of unorthodox economic policies, including the nationalization of assets managed by private pension funds, a flat income tax rate of 16 percent and windfall taxes on several sectors of the economy, including banking, retail and telecommunications.

A statement released an hour after the rate cut indicated the central bank's rate-setting Monetary Council was ready to keep lowering interest rates in an effort to boost economic growth.

"There is considerable spare capacity in the economy and inflationary pressure is moderate in the medium term, so the 3 percent (inflation) target can be met with looser monetary conditions," the bank said. "The Council will consider a further reduction in interest rates if medium-term inflationary pressures remain moderate and the uncertainty surrounding financial market developments diminishes."

Hungary's economy contracted by 1.7 percent in 2012 and the central bank is forecasting growth of 0.5 percent this year and 1.7 percent in 2014. Inflation was 5.7 percent last year and is expected to fall to 2.6 percent this year, thanks in part to state-mandated cuts to utility prices and shrinking domestic demand.

As of Tuesday, bank officials are no longer holding news conferences after rate-setting meetings, as has been customary for many years.

"This could diminish the transparency of monetary policy," said a note from analyst Gergely Suppan at Takarekbank in Budapest, who predicted the central bank's base rate would fall to 4.5 percent by the end of the year.

[Associated Press]

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