Budapest  - The Hungarian central bank lowered its base rate from 11.5 per cent to 11 per cent in a surprise move Monday.

The bank also issued its latest quarterly inflation report Monday, which warned that Hungary was set to enter a recession next year.

The Hungarian National Bank (MNB), which had in August predicted a 2.6-per-cent growth in GDP in 2009, said that it now expected the economy to shrink by 1.7 per cent to
2 per cent.

The central bank forecast a relatively brief recession, but warned that recovery would be very slow because of the widening economic crisis in countries that form Hungary's main export markets.

MNB head Andras Simor, speaking shortly after the decision to lower the base rate, said members of the rate-setting monetary council had three choices: Maintain the existing rate, or reduce it by 50 or 100 basis points. The overwhelming majority supported the 50-basis-points lowering.

The move came as a surprise to analysts who thought the bank would not begin trimming its high base until the first quarter of next year.

"A reduction of more than 50 basis points would have posed a significant risk to the financial system and the Hungarian economy under the present conditions," said Simor.

On October 22, the MNB hiked the base rate a whopping 300 basis points from 8.5 per cent to 11.5 per cent in response to the worsening international economic situation. At the time, Simor had described the hike as an appropriate response to an "extraordinary" situation. Amid fears of a currency collapse, the move made it more expensive to speculate against the Hungarian forint.

The Hungarian currency, which had reached an all-time low against the euro at 284 on October 23, strengthened to 261 by the end of the month.

On Monday afternoon, the forint was trading at 260 to the euro, compared to 269 Friday. The BUX, Hungary's benchmark stock exchange index, closed up 7.3 per cent at
11,735.66.

Hungarians are particularly vulnerable to currency fluctuations - besides national debt, most mortgages and personal loans are denominated in Swiss francs and euros. In the wake of October's wild fluctuations, several banks either imposed stringent conditions or stopped issuing foreign currency loans altogether. (dpa)