Balog told Reuters that while the tapering of the Fed stimulus called for caution, Hungary’s vulnerability to external shocks has decreased markedly.

Hungary, like its central and eastern European peers, has enjoyed large capital inflows into its bonds on the back of the Federal Reserve’s bond-buying, which has allowed its central bank to cut its base rate to 3% from 7% in August, 2012.

Balog said Hungary’s big current account surplus, low budget deficit and declining net external debt had helped it weather the first signs of tapering well.

“I believe that based on Hungarian inflation expectations, and our inflation forecasts, there is room for a further reduction in interest rates, which could go as low as 2.5%,” Balog told Reuters.

“There is still enough room for manoeuvre in interest rate policy to keep the inflationary path on target or around the target,” he said. Hungary’s central bank is likely to end its ongoing monetary easing cycle at a terminal policy rate of just above 2%, London-based emerging markets economists said on Thursday.

In a report highlighting key findings of a recent trip to Budapest, analysts at BofA Merrill Lynch Global Research said their visit had led them to reassess their expectations for Hungary’s monetary policy. “We cut our forecast for the policy rate to 2.25% by May, expecting the [Monetary Council] to shift to 15bp monthly cuts (though 10bp per month is also a possibility)”.

Source www.hungarymatters.hu

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