Bloomberg News

Hungary Bank in Wait-and-See Mode on Debt Crisis, Price Risk

October 25, 2011

(Updates with comment from central bank in first paragraph, Simor in second, economists in fifth and ninth.)

Oct. 25 (Bloomberg) -- Hungary’s central bank kept interest rates unchanged for a ninth month, saying the European debt crisis raised the country’s borrowing and risk costs and pressured the forint, justifying “a wait-and see” approach.

The Magyar Nemzeti Bank kept the benchmark two-week deposit rate at 6 percent today, matching the projection of all 20 economists surveyed by Bloomberg. Policy makers, who also considered raising the rate to 6.25 percent, “overwhelmingly” voted to keep it unchanged, according to central bank President Andras Simor.

“We see a good chance that the recent volatility on international markets will persist for a longer period and therefore the Monetary Council believes that a wait-and-see monetary policy is justified in the current situation,” Simor told reporters in Budapest after the decision.

As European leaders grapple to contain the euro area’s debt crisis, investors are demanding higher yields on riskier debt. The forint weakened 2.4 percent against the euro since the last rate-setting meeting, Hungary’s credit-default swaps rose to the highest in 2 1/2 years and the five-year bond yield this month reached the highest since January.

Polish, Czech Rates

Central banks across eastern Europe have been weighing faltering growth prospects against weaker currencies as Europe’s debt crisis roils investors. Poland left its benchmark rate unchanged for a third meeting at 4.5 percent on Oct. 6 after Czech policy makers on Sept. 22 held the two-week repurchase rate at a record-low 0.75 percent.

Forward-rate agreements fixing Hungarian three-month interest rates in three months were 55 basis points above the three-month Budapest Interbank Offered Rate, indicating investor expectations for a rate increase. A basis point is 0.01 percentage point.

“For now, the central bank seems to be firmly on hold, balancing weak demand versus financial stability risks,” Elisabeth Andreew, strategist at Nordea Bank AB, said in an e- mailed report. If the forint rate against the euro “rises sharply above 300, we see a high risk of an emergency rate hike.”

The forint fell 1 percent to 298.19 per euro by 5:09 p.m. in Budapest and credit-default swaps, which measure the cost of insuring government debt against non-payment, rose to the highest in 2 1/2 years on Oct. 4. The yield on the benchmark five-year bond surged to 7.97 percent on Oct. 4, the highest since Jan. 10, and was 7.25 percent today.

‘Surrounded by Uncertainties’

Hungary may meet the central bank’s 3 percent inflation target in 2013, Simor said. The bank earlier predicted reaching that goal in the first half of the same year.

The outlook “is surrounded by uncertainties,” Simor said. A weakening forint has boosted inflation risks and if the currency “stabilizes at current levels these risks become more significant.”

The central bank last week raised its 2012 inflation estimate to 4.9 percent last week from 4.7 percent, to reflect the impact of tax increases. The government, which is raising the excise tax this year and the value-added tax, a sales levy, next year, forecasts average inflation of 4.2 percent for 2012, Economy Minister Gyorgy Matolcsy said Sept. 16.

“If the forint remains permanently at the current weak level against the euro, the Monetary Council is likely to strengthen its hawkish tone and start a gradual rate hike cycle to protect its credibility,” Eszter Gargyan, economist at Citigroup Inc in Budapest, said in a report.

The Magyar Nemzeti Bank cut its growth forecast for next year to 0.6 percent from 1 percent, compared with the government’s 1.5 percent projection.

“Hungary’s growth outlook has deteriorated significantly in the past period,” the central bank said in the statement.

--Editors: Balazs Penz, Jeffrey Donovan

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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