Weak economy at the fore as Hungary rates plumb new low

By Gergely Szakacs

BUDAPEST (Reuters) - Hungary's central bank cut interest rates by a quarter percentage point for the ninth month running on Tuesday, taking advantage of record low inflation to bolster government efforts to drag the indebted economy out of recession.

Like previous months, there had been speculation ahead of the decision of a larger half-point cut as new Governor Gyorgy Matolcsy pushes forward with other measures to support small business, revive lending and help rebalance the economy.

Analysts said there may be more clues on that drive in a statement explaining the decision at 1300 GMT, following hints that the bank was examining ways of tweaking its bill operations to help reduce Hungary's foreign debt.

"Overall, we have a central bank (NBH) that is now targeting inflation, growth, credit, government policy, government funding and NBH cost all at once and the unorthodoxy has only just begun as Governor Matolcsy said himself last week," said analyst Peter Attard Montalto at Nomura.

Matolcsy, a former economy minister and close ally of Prime Minister Viktor Orban, announced a $2.1 billion programme this month to help small businesses ahead of next year's parliamentary election.

The bank's rate-setting panel, all of whom were picked by Orban or his ruling Fidesz party, is expected to plough ahead with more cuts in rates this year.

The bank's moves to date have put pressure on the forint but have stopped short of the sort of radical monetary easing which analysts say could provoke a broader crisis for Hungary's financial markets.

The forint firmed to 299.60 from 301 after Tuesday's decision.

With inflation at a 38-year-low of 2.2 percent due to household energy price cuts imposed by the government, the bank is trying to stave off a deeper economic downturn.

Rate cuts totalling 225 basis points since last August and the cheap money flowing from central banks in the developing world have pushed official borrowing costs to record lows. But for now there is little evidence that has boosted demand for new loans as many Hungarians struggle to repay foreign currency mortgages which they took out in the boom years.

"The NBH is committed to loosening and has reasons to increase the pace. Inflation is well below the target, real rates are high, and growth is still subpar," Barclays said in a note ahead of the rate meeting.

(Reporting by Gergely Szakacs; Editing by Patrick Graham)