Hungarian central bank cuts interest rates to 7.5 percent

The Hungarian central bank on Monday lowered its key interest rate by a quarter of a percentage point to 7.50 percent in response to slowing inflation, bank president Andras Simor said.
"The August inflation figure was perhaps slightly worse than we expected, but the difference was not such that it would change our basic picture of the inflationary path," Simor told a press conference. "We continue to believe that the 2009 inflation target is achievable," Simor said.
According to the latest consumer price data published by the central statistics bureau KSH, the annual rate of inflation in Hungary stood at 8.3 percent in August, fractionally lower than the 8.4 percent recorded in July. In the period from January to August, the 12-month rate of inflation averaged 8.5 percent.
The central bank forecasts the annual rate of inflation to average 7.6 percent in 2007. Inflation is then expected to slow sharply to 4.5 percent in 2008 and to 3.0 percent by 2009.
But upward price pressures threats remained, Simor stressed, saying the bank would be closely watching the upcoming public-sector wage round for 2008. "All wage increases that do not go along with a rise in productivity tend to increase inflation and lead to interest rate rises, or at least they make interest rate cuts difficult," Simor said.
Speaking of the international market mood, Simar said "uncertainty remained," but that investors were starting to look favourably on Hungarian investments. "It was good to see that the market is starting to differentiate between investments and that, in the past few weeks, the risk premium related to forint investments decreased. We think that is positive," Simor said.
Hungary's high inflation rate partially reflects big cuts in state subsidies for household energy, which were implemented to rein in the public deficit, which at 9.2 percent of gross domestic product (GDP) is the highest in the European Union.
The central bank had already cut its key interest rates by a quarter-point to 7.75 percent in June. Prior to that, the interest rate had been held at 8.0 percent since October of 2006.