The National Bank of Hungary (NBH) slashed its base rate by 75 basis points on Tuesday to 8.25%.

This decision, after the Forint hit a one-year low, marks a deceleration in the rate-cutting process. The decline in the Forint is attributed, at least in part, to an escalating tension between the central bank and the government.

After cutting borrowing costs by 975 basis points within an easing cycle introduced last May, the NBH said monetary policy would enter a new phase, with the pace of rate cuts decelerating in Q2.

Monetary policy needs to remain tight, said deputy governor Barnabas Virag, and financial stability was essential to sustainably reach the bank's 3% inflation target, Reuters reports.

"Inflation could return to around the 3% target in 2025," Virag stated, going on to add that the base rate declining to 6.5-7% by the end of June was a "realistic scenario."

The deputy governor added that taking into account changes in the global risk environment, the NBH should follow "an increasingly cautious monetary policy in the second half of the year."

Virag said the bank considered options for rate cuts of 50, 75 and 100 basis points, yet the final decision was unanimous.

Reducing its benchmark rate brings Hungary nearer to Romania's 7% key rate, the highest in the European Union. In Romania, persistent inflationary pressures and tax increases at the beginning of the year have hindered the central bank from implementing easing measures up to now.

Last year, Hungary's economy tipped into recession as inflation rose above 25%.

Furthermore, the Forint has faced pressure due to a proposed alteration in the oversight of the central bank, causing concerns among investors about potential damage to its independence. 

Additionally, European lawmakers' attempts to reverse a decision to allocate €10 billion of funds for Hungary have added to the currency's challenges.

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