Bloomberg News

Hungary to Keep Rates Steady as Franc-Loan Plan Hurts Forint

September 20, 2011

(Updates with economist comments in fourth and 13th, markets in fifth and sixth, franc-fix plan approval in seventh.)

Sept. 20 (Bloomberg) -- Hungary will probably leave borrowing costs unchanged for an eighth month as a plan to force banks to swallow losses on Swiss-franc loans hurts the forint, eliminating room for a rate cut amid slower economic growth.

The Magyar Nemzeti Bank will keep the benchmark two-week deposit rate at 6 percent today, according to all 21 economists surveyed by Bloomberg. The decision will be announced at 2 p.m. in Budapest, with central bank President Andras Simor to comment at 3 p.m. 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 may hold rates flat to support the currency even after the government last week slashed 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., wrote in an e-mail today.

Weakening Forint

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.

Hungarian six-month forward-rate agreements were 19 basis points above the three-month Budapest Interbank Offered Rate today, compared with 19 points below a month ago, indicating 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 241.7 forint per franc and 291.4 forint per euro today.

‘Significant Threat’

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 have said the country needs to maintain its benchmark rate at 6 percent for an “extended period” to slow inflation to their 3 percent target next year.

“It will be much more about what the central bank says than does,” Gillian Edgeworth, a London-based economist at UniCredit Spa, said by e-mail Sept. 18. “Financial stability will be at the forefront of central bank priorities, taking any prospects of a rate cut firmly off the table.”

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, Economy Minister Gyorgy Matolcsy said Sept. 16.

‘Forceful’

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 the forint now trading at its weakest level against the euro for 14 months, any move in the next three months is far more likely to be up than down,” Neil Shearing, an economist at Capital Economics Ltd. in London, wrote in an e-mail yesterday. “The chance of a defensive rate hike of 50 basis points or so” at today’s rate meeting “may now be as great as 50:50.”

--With assistance from Kristian Siedenburg in Budapest. Editors: Andrew Langley, James M. Gomez

To contact the reporters responsible for this story: Zoltan Simon at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net


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