The Hungarian central bank on Monday lowered the country's key interest rate by a quarter of a point to 7.75 percent, citing falling inflation, the rate-setting Monetary Council said in a statement.
"The Monetary Council considers that data from the past months confirmed that inflation has peaked ... The easing of uncertainty about inflationary expectations make it possible for the central bank to lower the key interest rate in line with the decreasing perceived risk of forint investments," the bank said.
The interest rate had been unchanged at 8.0 percent since October of 2006. The decision to lower rates surprised most analysts, who had cited a slower than expected pace of inflation reduction as a reason for the central bank to leave interest rates unchanged.
Inflation had climbed steadily since June of last year, when 12-month inflation was only 2.8 percent, to a peak of 9.0 percent recorded in March of this year. The trend mostly reflected tax rises and big cuts in state subsidies for household energy, which were implemented to rein in the public deficit, the highest in the European Union at 9.2 percent of economic output last year.
Since March, 12-month inflation has decreased gradually to 8.8 percent in April and to 8.5 percent in May. The central bank forecasts 2007 inflation to average 7.3 percent, followed by 3.6 percent in 2008.
The Monetary Council said it would remain vigilant over inflation in future interest rate decisions. "The uncertainty surrounding inflationary trends is reason to remain cautious. The further reduction of the key interest rate will only be possible if investment risk assessments remain positive and inflationary risk continues to decline," the bank said.
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