Hungary cuts rates by half percent

In a statement, the central bank said that the reduction was due to forecasts that inflation is set to decline from its peak in May to around six percent by December 2004. On the whole, the Council judges that the monetary conditions developing in the wake of the current interest rate reduction, coupled with the required level of fiscal tightness and next year' moderate wage growth, will be sufficient to meet the four percent inflation target for end-December 2005, the statement said.

The central bank stressed the importance of fiscal targets being met if inflation were to remain under control, and warned that further considerable policy efforts must be made if the government deficit was not to rise above 4.6 percent. It also urged parties in wage negotiations to focus on modest wage growth in 2005, and not to base their demands on the level of inflation in the past year, which has been affected by one-off factors.

According to a report by Channel NewsAsia, the unofficial reason for the rate cut is considered by economists to have been an attempt to weaken the country's currency. Although the exchange rate fell to 248.7 forint to the euro after the interest rate decision, the central bank views a range of between 250 and 260 forint to the euro as the most appropriate for Hungary to join the eurozone, according to the article.

Click here to read the press release on the monetary council's decisions