The National Bank of Hungary cut its base rate, used for the 2W deposit
facility, to 9.00%, i.e. by 50 bps, today. In its statement, the bank only
said that the reduction is in line with its inflation target of 4.5 +/- 1%
for December 2002. The cut was well expected after the recent fall in
inflation, however, we expected a more gradual approach by cutting only 25
bps this week. It seems that the bank is optimistic towards the next
inflationary development. The CPI could fall significantly in y/y terms in
January 02 and even more in the first half of this year. (We do not exclude
that the CPI falls from 6.8% in December as low as below 6% in January). The
cut should only support the present optimistic mood on the bond market. One
of the reasons for the cut could the strong forint, but unless the rally on
the bond market is over, we see no reason for the Hungarian currency to
loose much steam. The bank is likely to continue with cutting rates further
in coming months, we expect another 50-100 in the first half of this year.
Jakub Dvorak, CSOB