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Central bank rate cuts criticized

June 1st, 2013

A liberal economist acknowledges that his fears about the impact of lowering the base rate have been proven unfounded. But he accuses National Bank chief György Matolcsy, nonetheless, of irresponsible management.

On Tuesday, the Hungarian National Bank cut the interest rate on fortnight deposits to a record low of 4.5 percent. After the decision, the Forint hit a yearly high of 285 against the Euro. Later in the week, however, the Hungarian currency weakened and on Friday it traded at 296 against the Euro.

Looking back on the successive monthly rate cuts in Magyar Narancs (print edition), Péter Pete acknowledges that despite earlier fears which he himself also shared, the Forint has not plummeted in value. Although the base rate has been successively cut from 7 per cent in July 2012 to 4.5 per cent now, the exchange rate of the Forint has not been affected, lower rates have not deterred foreign investors from buying government bonds, and even inflation seems to be under control, the liberal economist admits. All this, however, is the result of the recent change in the international investment environment, Pete believes. Earlier fears of sovereign defaults in Europe have eased, and investors have become less risk aversive and turned to riskier assets. But “pure luck does not justify the gamble by the National Bank,” Pete concludes.

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