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Hungarian central bank cuts base rate to record low

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(Globalpost/GlobalPost)

Hungary's central bank cut on Tuesday its base rate by a quarter of a point to a record low of 4.25 percent, the 11th monthly cut in a row since an easing cycle began last August.

The cut was the fourth since Gyorgy Matolcsy -- a loyal ally of Prime Minister Viktor Orban -- was appointed central bank governor in March amid fears that government influence over monetary policy would increase.

It was in line with most analysts' expectations, although some had cautioned that recent turbulence in international financial markets might weigh against such a move.

London-based analysts Capital Economics said however that the easing cycle was nearing an end.

"We now expect one further rate cut, to 4.0 percent, and then for rates to be left on hold," William Jackson said in a research note.

Real interest rates are now at an historic low reflecting the scale of the rate-cutting cycle, Jackson said, while the economy is now showing signs of improvement.

EU member Hungary exited recession in the first quarter with growth of 0.7 percent, outperforming many other emerging European economies, while inflation eased in April to a 39-year low of 1.7 percent.

Retail sales and industrial output have also both picked up quickly in recent months.

Last Friday, EU finance ministers approved removing Hungary from special budgetary monitoring -- the excessive deficit procedure -- where it has been since joining the European Union in 2004.

The European Commission said that Hungary had done enough to bring its budget deficit under the EU ceiling of 3.0 percent of gross domestic product in both 2013 and 2014.

Unemployment however remains high at close to 12 percent, direct foreign investment continues to fall, Hungarian government bonds are rated "junk" by the main agencies and bank lending remains weak.

The national currency the forint, which had weakened in the last week, remained stable after Tuesday's announcement, trading at 296.60 to the euro at 1200 GMT, compared with 296.75 just before.

Hungary's 10-year bond yields moved to 6.56 percent Tuesday afternoon compared to a closing rate of 6.75 percent on Monday. The rate has been climbing since May when it reached 4.88 percent. A year ago, however, long-term bond yields were 8.02 percent.

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http://www.globalpost.com/dispatch/news/afp/130625/hungarian-central-bank-cuts-base-rate-record-low-0