The decision by Hungary’s central bank to cut its prime interest rate by 25 bps to 6.75 has sparked a wave of debate not only over the wisdom of the move, but the strategy behind it. Most see it in large part as an attempt to kick start an economy that seems bent on slipping back into recession. GDP was down 0.2 percent in the second quarter of 2012, and was 1.2 percent off the pace from the same period in 2011.
What worries some analysts is that it comes at a time when inflation has risen to 5.8 percent in July, from 5.6 percent in June, since cheaper money could make cost of living increases even more difficult to keep in hand. The bet seems to be that with IMF discussions underway, the prospect of an improved fiscal environment following agreement could offset investor fears.
