The monetary council of the CB cut the base rate by 50bp, to 6.50% today, in line with expectations. At the same time, the CB announced the widening of the interest rate corridor to +/- 100bp, from the earlier +/- 50bp, which came as a surprise. This effectively means that the interest rate on the overnight central bank deposits decreased by 100bp - from 6.50% to 5.50% - while the interest rate on overnight collateralized loans remained at 7.50%. Please note that the CB had tightened the interest rate corridor to +/- 50bp last October, when they had carried out an emergency hike of 300bp in the base rate (from 8.50% to 11.50%). Considering this, today's widening of the interest rate corridor rather indicates normalization of the markets. Given today's decision, the lower interest rate on deposits may decrease the amount of money, parking at the CB. On the other hand, the cost of any position against the forint has practically remained at the same level.

The main message of the statement of the monetary council has been that reasons for today's rate cut have remained the same as they were in the recent months (uncertainties around the economic recovery, undershooting of the 3% y/y inflation target). According to the statement, interest rates may be reduced further, if this does not threaten the inflation outlook and if risk assessment allows this. The statement added however, that the Hungarian economy continues to be vulnerable, which demands cautious monetary policy.

At the press conference, Governor Simor said that the council discussed 25bp, 50bp and 75bp reductions in the base rate. The final decision (a 50bp cut) was supported by a clear majority. A discussion about a rate cut of only 25bp could suggest however that the CB may really shift to steps of 25bp, instead of the usual 50bp, before completing the rate reduction cycle. The most recent economic forecasts of the central bank's staff (also published today) however suggest that the ongoing rate cutting cycle is not over yet. Compared to August, the GDP forecasts for 2009 and 2011 have remained unchanged (-6.7% y/y and +3.4% y/y, respectively). As for the 2010 GDP prediction, it was revised slightly upwards - to -0.6% y/y, from -0.9% y/y, projected in August. Simor mentioned at the press conference that a bit more positive GDP prediction for next year was based on the expected better net exports. As for inflation prospects, the new inflation prediction for 2009 is 4.2% y/y (projected at 4.5% y/y in August). For 2010 and 2011, the inflation predictions were revised slightly downwards - to 3.9% y/y from 4.1% y/y and to 1.9% y/y from 2.1% y/y, respectively. The full report will be published on Wednesday morning.