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Hungary central bank cuts deposit rate into negative territory

The National Bank of Hungary cut its overnight deposit rate by 15 basis points to -0.05 percent on Tuesday and lowered its overnight lending rate to 1.45 percent from 2.1 percent.

The bank has also cut its key base rate by 15 basis points to 1.2 percent despite market expectations for no change at the March policy meeting.

The main facade of the Hungarian central bank.
Bloomberg/Contributor | Bloomberg | Getty Images
The main facade of the Hungarian central bank.

Negative rates is a policy tool which has already been deployed by the likes of Japan, Switzerland, and the European Central Bank (ECB).

Denmark's central bank became one of the first to adopt negative deposit rates in July 2012 at negative 0.2 percent. It has since pushed rates to minus 0.65 percent , in a bid to spur further bank lending and boost the country's economic recovery. Switzerland has set its own deposit rate at negative 0.75 percent, while Sweden has pushed its key interest rate to negative 0.5 percent.

Most recently, the European Central Bank stopped short of a dip below zero on its main refinancing rate but slashed its deposit rate to minus 0.4 percent.

William Jackson, a senior emerging markets economist at Capital Economics said Hungary's surprise move on Tuesday probably marks the start of a modest easing cycle.

"As things stand, we expect a further 20 basis points or so of cuts in the coming months, bringing the policy rate to 1.0 percent by year-end," he said in a note.

"Today's decision was probably triggered by a few factors including additional policy stimulus by the ECB, likely downwards revisions to the National Bank's inflation forecasts (due to be released in this month's inflation report), and the weaker-than-expected activity and inflation data released over the past month."

The economy in Hungary is likely to slow a little and inflation could edge lower in the next few months, according to Jackson.

—CNBC's Kalyeena Makortoff contributed to this article.