The rate-setting monetary council of Hungary's central bank surprised analysts on Tuesday when despite a weakening forint and an indirect plea from the finance minister, it cut the benchmark interest rate by a further 15 basis points. This brings the two-week deposit rate down to 2.70 percent, an all-time low.
This was the 19th straight rate cut, reducing the interest rate from 7 percent in August 2012 to the current record low.
A statement issued by the bank said the Monetary Council expected the Hungarian economy to grow, employment to continue to rise and joblessness to drop.
It acknowledged that the international investment mood had been fluctuating and Hungary's risk assessment had deteriorated but emphasized that the country's fundaments were strong and that it was reducing its foreign debt. The current account surplus was also helping.
Underlining the significant reserve capacities in the economy, the council predicted that inflationary pressures could remain low. Despite growing uncertainties on the money market, said the statement, there was still room to reduce interest rates. However, a long-term downward shift in the country's risk assessment could get it to change its mind.
With the forint consistently weakening, having dropped to as low as 314 to the euro earlier in the month, Finance Minister Mihaly Varga told a Tuesday television audience he "hoped that the bank would act responsibly" and that cuts to date had contributed to the forint's weakness. Most analysts had predicted that the bank would reduce the benchmark anyway, but by no more than 10 points.
Predictably, the forint sank following the announcement. Earlier in the day, it had firmed to 308 against the euro, but dropped to below 310 on the news. Against the dollar, the forint went down from 224.55 to 226.
Hungary's inflation rate is low and its current account balance shows a surplus, which might support the decision except that it is funding its deficit from the market. The move, along with international events, such as the U.S. Federal Reserves' declining efforts to stimulate growth, could make investors less willing to purchase its securities at the lower rates.
All members of the Monetary Council were appointed by the current Prime Minister Viktor Orban-led administration, which is heading towards parliamentary elections in April.
Orban had advocated the series of rate cuts leading to doubts about the independence of the central bank with Gyorgy Matolcsy, a close Orban ally, at the helm. While all polls show a sizable lead for Orban's Fidesz party, the rate cut indicates a refusal to cast even a shadow of a doubt among voters.