BUDAPEST: Hungary central bank will impel up to 2 trillion forints into the weak economy to provide inexpensive loans and it will cut interest rates to businesses, betting on a continued inflow of capital into the domestic markets.
National Bank Governor Gyorgy Matolcsy, a close ally of Prime Minister Viktor Orban, who faces elections next year, said low inflation, Hungary's improving fundamentals and global monetary loosening gave the bank room for more rate cuts.
The bank has been steadily cutting rates since August 2012 to a record low of 3.8 percent, supporting the government's pro-growth policies. It also launched the first tranche of its funding for lending programme in April to boost the economy and has now decided to extend it until end of 2014.
Hungary's currency and bonds have been propped up by big capital inflows into emerging markets over the past year and inflation was running at a 39-year low of 1.3 percent in August.
But analysts have warned that if the Federal Reserve decides on a tapering of its own stimulus in the US, that could result in a withdrawal of capital from emerging markets.
Matolcsy told a news conference on Wednesday that he believed loose monetary conditions in the world would prevail.
"There is a third factor (that underpins further easing)," he said. "This is what we had expected, but is now clear to everyone, that in the world of global central banks, loose monetary policy will not come to an end."
His deputy Adam Balog told Reuters a further 10-20 basis point cut in late September was "on the cards".
The Fed will meet next week when it is expected to announce a modest cutback in its bond-buying programme, but also say that the programme will continue well into 2014.
The forint, along with central Europe's other currencies, has largely escaped a recent sharp weakening in other emerging currencies, thanks to the region's close ties to a recovering euro zone and Hungary's big current account surplus.
However, Eszter Gargyan at Citigroup said the Hungarian bank's fresh stimulus and further rate cuts could increase Hungary's vulnerability if global winds change.
"Easing monetary conditions driven by declining short-term rates and increased HUF liquidity, mixed with loosening fiscal policy stance in the run-up to elections, point towards a risk of the currency weakening if external market conditions deteriorate," the economist Gargyan said.
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