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Hungary moves on interest rate as inflation threatens and forint flounders

Hungary's Prime Minister Viktor Orban waits for the start of a round table meeting at an EU summit in Brussels, Monday, June 17, 2024.
Hungary's Prime Minister Viktor Orban waits for the start of a round table meeting at an EU summit in Brussels, Monday, June 17, 2024. Copyright Geert Vanden Wijngaert/Copyright 2024 The AP. All rights reserved.
Copyright Geert Vanden Wijngaert/Copyright 2024 The AP. All rights reserved.
By Eleanor Butler
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A further reduction comes on the back of more than a year of rate cuts, although a drop in the forint is curtailing dramatic changes.

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The National Bank of Hungary has reduced its base interest rate by a quarter point, down from last month's 7.25% to 7%.

The cut comes after larger half-point reductions in April and May - and is the latest in a series of cuts which began in May last year.

Before the bank started lowering borrowing costs, the key interest rate peaked at 18%, reaching the highest level seen in the European Union during this period.

Experts believe that the cautious approach to easing was precipitated by a drop in the forint and creeping inflation.

The Hungarian currency has fallen 2.5% against the euro over the past month as markets reacted badly to unstable economic conditions.

One factor driving the forint lower is a feud between the country's central bank and Prime Minister Viktor Orban, who has been pushing the monetary policy committee to cut rates more quickly.

Economy Minister Marton Nagy has been heavily critical of the National Bank of Hungary for keeping borrowing costs high in an attempt to curb inflation, a move that he argues is stifling the economy.

In March, the bank openly challenged the government over policies that it viewed as harmful to their independence.

These included caps on prices and interest rates.

Inflation in Hungary, meanwhile, edged up very marginally in April and May despite a sustained reduction evident throughout the last year.

Annual inflation was at 4% last month, up from 3.7% in April and greater than a more than-three-year low of 3.6% seen in March.

Hungary's medium term inflation target is 3%.

Looking at rate cuts moving forward, Deputy Governor Barnabas Virag said last month that there remained "very, very limited" room for further easing.

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