The Hungarian central bank has changed interest rates for the first time since December 2011. The cut has not come out of the blue, but was expected to come later. Not only the consensus, but also the market reaction shows that it was a surprise. The cut had a tight majority over no change. The MNB said that the inflation may remain above target over the monetary policy horizon and that the target may be reached later than previously believed. The economy is technically in recession and, according to the bank, domestic demand is likely to fall further in the coming quarters.
Evidently, the key reason behind the rate decision was the weak economy and its outlook. The statement suggests that the central bankers believe that second-round effect will not occur, although the inflation remains high. Another condition for the cut was an improvement in risk assessment - the MNB seems to be confident that the government will reach the deal with the IMF/EU and will keep fiscal policy tight. The cut may also be a test for the Hungarian assets´s resilience. If the risk premia remain stable, the MNB will likely consider more easing by the end of the year.