Hungary's central bank surprises with early rate cut UPDATE

Hungary's central bank surprises with early rate cut UPDATE

	Published : Mon, 25 Jun 2007 16:01 By : Agencies Print this Story

(Updating with central bank quote, details of talks in Poland and the Czech Republic)

BUDAPEST (Thomson Financial) - Hungarian central bank MNB defied analysts' expectations by cutting its key interest rate, despite data earlier in June that had convinced analysts it would hold it steady for another month.

The bank's policymakers cut its main borrowing rate -- the highest in Europe -- by a quarter of a percentage point to 7.75 pct, and said they would make further cuts if they saw evidence inflation was moving lower.

Most analysts had predicted the bank would hold interest rates because of figures earlier in the month showing wages rose more than expected in April.

But the bank said once the effects of lower tax avoidance in the labour market were taken into consideration, the increase in wages was minimal.

'After these effects have been removed from the data, then the rate of wage growth is minimal,' the bank said in a statement.

The MNB began raising interest rates from 6.0 pct in June last year to combat rising inflation brought on by regulated price increases and tax hikes, designed to trim Hungary's booming budget deficit.

Hungary's key rate had remained unchanged at 8.0 pct since October, although most analysts had expected a move within months. Some said the performance of the forint is likely to prove crucial to the bank's future decisions.

'We would expect more rate cuts,' said Danske Bank senior analyst Lars Christensen in a note to clients. 'But the MNB is likely to remain fairly cautious and much will depend on developments on global financial markets and how the forint stands up to a possible rise in global risk aversion.'

Policymakers in nearby Poland and the Czech Republic are also meeting this week, with markets expecting both to hold rates steady before raising them in July to calm their booming economies.

After a first rate rise in three years in April, Poland's main rates stand at 4.25 pct. The Czech bank's two-week repo rate is the lowest in the expanded EU at 2.75 pct.

patrick.graham@thomson.com

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