At its today's rate setting meeting, the monetary council cut the base rate by 25bp, to 6.25%. The decision was in line with our expectation, the majority of the market analysts however expected that the CB would cut by 50bp (to 6%) also this month.

According to the statement of the monetary council, uncertainties surrounding future developments in global financial markets have allowed a smaller reduction in interest rates than in the past. Interest rates may only be reduced further if changes in perceptions of risks associated with the economy allow it.

At the press conference Governor Simor said that the council discussed 25bp and 50bp reductions in the base rate. The final decision (a 25bp cut) was supported by a strong majority. He added that Hungary's risk assessment would determine future's steps and he could not predict the bottom of the rate path.

All in all, as it had been suggested earlier by comments of some rate-setters, the most important reason for today's cautiousness of the central bank was increased concerns about possible negative changes in the external environment, which could have negative impacts on the forint exchange rate. Thus, the central bank has shifted to steps of 25bp this month, instead of the usual 50bp. As for the continuation of rate cuts, we think that the bottom should be at 5.50%, which is expected to be reached by March next year.