Sept. 20 (Bloomberg) -- Hungary left borrowing costs unchanged for an eighth month as a plan to force banks to swallow losses on Swiss-franc loans hurt the forint, eliminating room for a rate cut amid slower economic growth.
The Magyar Nemzeti Bank kept the benchmark two-week deposit rate at 6 percent today, matching the forecast of all 21 economists surveyed by Bloomberg. Central bank President Andras Simor will comment at 3 p.m. in Budapest The bank will also forecast the direction of monetary policy in its quarterly Inflation Report.
The forint plunged after Prime Minister Viktor Orban’s ruling party said Sept. 9 that it will let homeowners repay Swiss franc-denominated mortgages ahead of schedule at exchange rates more than 20 percent below the market, forcing lenders to absorb losses. Policy makers held rates even after the Cabinet cut its 2012 growth forecast to 1.5 percent from 3 percent.
“Despite inflation and economic growth probably slowing, we expect interest rates to stay unchanged in the next quarters if the pressure on the forint holds and it fails to appreciate,” Piotr Kalisz, a Warsaw-based economist at Citigroup Inc., said today by e-mail before the decision.
Central banks across eastern Europe have held borrowing costs steady, even as economic growth slows, to shield their currencies as investors exit emerging markets. Poland left its benchmark interest rate unchanged for a second meeting Sept. 7 as fears of an economic slowdown overshadowed concern that price growth may quicken.
The forint has lost 5.8 percent against the Swiss franc and 5 percent against the euro since Sept. 8. Credit-default swaps, which measure the cost of insuring government debt against non- payment, rose to the highest in two and a half years yesterday.
Forward-rate agreements fixing three-month interest costs in three months rose to a six-month high of 6.34 percent today. The FRA traded 24 basis points above the three-month Budapest Interbank Offered Rate to which it settles, compared with a spread of minus 21 basis points on Aug. 22, a day before the previous rate decision. That indicates a reversal of investor expectations from a rate cut to a rate increase. A basis point is 0.01 percentage point.
Hungary, where two-thirds of mortgage loans are denominated in Swiss francs, is struggling to help borrowers after the Alpine nation’s currency rose to a record, boosting defaults and pushing up monthly payments. Parliament yesterday approved a law to fix exchange rates at 180 forint per Swiss franc and 250 forint per euro for early repayment, compared with market rates of 241 forint per franc and 291 forint per euro today.
Hungary expects 10 percent of the almost one million households holding foreign-currency mortgages to take part in the early repayment plan, the Index news portal said yesterday, citing a letter sent from Economy Minister Gyorgy Matolcsy to his Austrian counterpart Reinhold Mitterlehner.
The plan is a “significant threat” to the financial system, the Hungarian Banking Association has said. It may further harm growth and public finances, Standard and Poor’s, which rates Hungary’s credit a step above junk, said Sept. 13.
Hungary’s fiscal challenges and economic vulnerability may prompt policy makers to “only gradually” adjust monetary conditions to worse-than-forecast growth and easing inflation, the central bank said in the minutes of its August rate-setting meeting. Policy makers in the past months said they needed to maintain the benchmark rate at 6 percent for an “extended period” to slow inflation to their 3 percent target next year.
Consumer prices rose 3.6 percent from a year earlier in August compared with 3.1 percent in July, accelerating for the first time in three months. The government, which is raising excise-tax rates this year and value-added tax rates next year, forecasts average inflation of 4.2 percent for 2012, Matolcsy said Sept. 16.
The forint may weaken to 300 per euro because of increasing concerns that Greece will default and as foreign-currency debt threatens Hungarian banks, Carolin Hecht, a strategist at Commerzbank AG in Frankfurt, wrote today in a research report.
A weakening of the forint to more than 300 per euro may trigger a “significant” upward revision of the inflation outlook and “forceful” rate increases of as much as 3 percentage points, Societe Generale SA strategist Guillaume Salomon said by e-mail Sept. 16 after meeting central bank officials in Budapest.
--With assistance from Andras Gergely in Budapest and Kristian Siedenburg in Vienna. Editors: Andrew Langley, James M. Gomez
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