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CEE ECONOMY-Hungary stays in recession in Q1, raising chance of rate cut

By Krisztina Than

BUDAPEST, May 16 (Reuters) - Hungary's economy stayed in technical recession in the first quarter, with GDP dropping 0.2% from the previous quarter, raising the chance that the central bank could start cutting Europe's highest interest rate this month.

Central Europe's households have been squeezed by high inflation, driven largely by soaring food and energy prices, with Hungary's inflation running at 24% year-on-year in April - Europe's highest level.

However, inflation slowed slightly from 25.2% in March, putting the idea of policy easing on the table, as surging borrowing costs stifle the economy.

While Hungary's GDP shrank, Romania's economy grew 2.3% on the year in the first quarter. On a quarterly basis, the economy advanced 0.1%. Slovak GDP also showed growth both in annual and quarterly terms.

The National Bank of Hungary has been the first in central Europe to take tentative steps toward looser policy after hiking rates between 2021 and 2022 to multi-decade highs. Last month, it reduced the top of its interest rate corridor, a first step that could lead to a cut in its key 18% one-day deposit rate.

The bank has said it will be watching the risk environment in deciding on next moves, but analysts say the chance of a rate cut at the bank's May 23 meeting have increased, with inflation on a downward trajectory and the forint hovering near one-year highs versus the euro.

«The rate cut cycle will likely begin in May ... the central bank focuses on inflation and market stability, and these two factors allow a rate cut,» said Peter Virovacz, an analyst at ING in Budapest.

Hungary's economy shrank by an annual 0.9% in the first quarter based on preliminary unadjusted data, in line with analyst forecasts. On a quarterly basis, economic output dropped by 0.2%.

The Ministry of Economic Development said in a statement it expected a strong recovery in the second half of the year with the economy growing by 1.5% over the whole of 2023. The central bank has previously faced pressure from Prime Minister Viktor Orban's government to cut the cost of credit because of its impact on the fragile economy. (Reporting by Krisztina Than Editing by Christina Fincher)

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