BUDAPEST: Financial market stability is essential to bring inflation back to the medium-term target due to the stronger impact of exchange rates on consumer prices, Hungary’s central bank said in the minutes of its March 26 policy meeting released on Wednesday.

The bank cut its base rate by 75 basis points to 8.25% lastmonth as expected, slowing the pace of rate cuts after theforint fell to a one-year low, in part due to an escalating standoff between the bank and the government.

While the tensions have eased in the past weeks, the forintis still down some 2% versus the euro this year, while Poland’szloty has gained the same amount, bolstered by renewed European Union fund flows and prospects of stable rates throughout 2024.

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“As the pass-through of exchange rate change into consumer prices had become stronger, it was in the interests of theHungarian economy to maintain a stable, predictable financialmarket environment,” Hungary’s central bank said.

Rate-setters said the structure of Hungarian inflation had changed, reflected in higher services price increases than previously seen.

Despite recent sharp falls in headline inflation in central Europe, services inflation ranged from 10.4% in Hungary to 7.3% in Poland based on the latest data, according to a tally by Raiffeisen Bank, well above levels seen in the past decade.

“Against this background, members stressed that subdued imported inflation was crucial to achieving the inflation target, for which maintaining stability in financial markets is essential,” Hungary’s central bank said.

The next policy meeting is due on April 23, when the bank has said it would likely slow the pace of rate easing further after cuts totalling 975 bps since last May.

Poland’s central bank has welcomed gains in the zloty, central Europe’s best performing currency this year, saying the stronger exchange rate can help curb inflation.