The Hungarian central bank has left interest rates unchanged and repeated that such a cautious stance is still justified. However, the bankers also discussed a 25 bps rate cut. The MNB will consider a rate cut if risk premium falls persistently and substantially and if the CPI outlook improves. The new inflation forecast is higher for 2013 due to the government measures, but Governor Simor said that the inflation might approach the target by the end of 2013 thanks to the weak demand and loose conditions in the labor market.
The new MNB projections see average inflation at 5.3 pct. this year, which is below the previous forecast. In 2013, inflation is projected at 3.5 pct., which stands above the previous figure and reflects fiscal measures. According to the bank, the GDP should contract by 0.8 pct. in this year and grow by 0.8 pct. in 2013. Both figures are lower than the previous forecast.
Although the MNB rhetoric is still not very dovish, Hungary is probably getting closer to a rate cut. The last data has confirmed that the domestic demand is weakening and the Eurozone figures are also worsening, which suggests additional downside risks for inflation. Furthermore, the country has made progress in the emergency loan issue, which may help to shrink the risk premium. Once the government is close enough to the IMF/EU deal, the MNB will probably consider monetary easing.