A divided Hungarian central bank (MNB) cut its main interest rate by a quarter of a percentage point to 5.75 percent on Tuesday, the fifth consecutive cut in as many months, and in line with the expectations of most analysts.
As with the four previous cuts, the bank's monetary council was divided between the four government-nominated members who supported a cut, and central bank head Andras Simor and his two deputies who favoured maintaining the rate at 6.0 percent due to concerns over high inflation.
Hungarian inflation, the highest in the European Union, reached 6.6 percent in September but fell to 5.2 percent in November.
In a statement released after the rate cut, the council said there was "room for movement in monetary policy" as "the global risk appetite has significantly strengthened".
"Reducing the rate can take place if the favourable financial market conditions continue and if the new indicators support the bank's inflation target [of 3 percent] can be reached," it said.
Simor, who has often clashed with Prime Minister Viktor Orban on economic policy and whose term as bank governor expires in March, told a press conference Tuesday that inflation of 5.7 percent is forecast for 2012, 3.5 percent in 2013, and 3.2 percent in 2014.
He explained that the latest 2013 forecast had been revised downwards from 5 percent due to the government's recent pledge to cut household gas, electricity and heating bills from January 1.
Simor also said the MNB expects gross domestic product to contract by 1.4 percent in 2012, with slight growth of 0.5 percent forecast for 2013 rising to 1.5 percent in 2014.
The Hungarian currency, the forint, remained relatively steady Tuesday afternoon, trading at 288.05 forints at 1445 GMT compared with 288.53 after the bank's decision.
While most analysts expected a cut, some predicted the bank's council would leave the rate unchanged after the forint fell on Monday reaching a five-month low against the euro of 290.20 forints by Tuesday morning.
A note from analysts at Capital Economics in London said that the general improvement in international risk appetite in recent months has "reduced concerns over external vulnerabilities and allowed the authorities to focus on shoring up growth".
"But these vulnerabilities have not disappeared, meaning that the scope for significant easing is limited. In fact, we think there is a very real risk that interest rates may need to be hiked in order to defend the currencies in 2013," it said.
"The weakening of the forint on Monday is a sign that the markets will not tolerate more cuts in interest rates," it added.
Equilor Securities in Budapest said that it expects the rate would be cut again in 2013 before stabilising at 4.75 percent.
"The monetary council has not been deterred by the falling forint," it said.