Bloomberg News

Hungary May Hold Rate as Europe’s Crisis Raises Risk Costs

October 25, 2011

(Updates markets in fifth and 11th paragraphs.)

Oct. 25 (Bloomberg) -- Hungary will probably leave interest rates unchanged for a ninth month as the European debt crisis raises the country’s borrowing and risk costs and the forint weakens, eliminating room to ease policy.

The Magyar Nemzeti Bank will keep the benchmark two-week deposit rate at 6 percent today, according to all 20 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.

As European leaders grapple to contain the euro area’s credit crisis, investors are demanding higher yields on riskier debt. The forint weakened 3.1 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. That may outweigh the central bank cutting its 2012 growth forecast last week.

“Hungary’s exposure to the European crisis and risk premia stabilizing at an elevated level will be the main arguments for the central bank to hold rates steady, even though real economic factors would call for lower rates” Adam Keszeg, economist at ING Bank Groep NV in Budapest, said in a telephone interview.

The forint fell 0.5 percent to 296.56 per euro at 10:19 a.m. in Budapest as traders pared bets for a rate increase. 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 7.28 percent today.

Forint Plunge

The currency has plunged 5.4 percent against the euro since Sept. 9 when Prime Minister Viktor Orban’s ruling party said 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.

Central banks across eastern Europe have been weighing faltering growth prospects against weaker currencies. 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.

Hungary, the first European Union nation to turn to the International Monetary Fund for a bailout in 2008, last year broke off negotiations with the Washington-based lender and said it would finance its deficit and debt from the market.

‘More Significant’

“The implications of the euro area’s crisis are more significant for Hungary than many other countries in the region,” as the country’s foreign-currency debt repayments are set to rise through 2014, Gillian Edgeworth, economist at UniCredit SpA in London, said in an e-mailed report.

Hungary’s decision to refrain from seeking IMF assistance forced the government into a “position whereby the sovereign cannot afford to be shut out of external markets for any longer than 1-2 quarters,” she said.

Forward-rate agreements fixing three-month interest 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.

“An interest-rate cut may be implemented only in the mid- term after the decline of the risk premium,” the central bank said in its quarterly Inflation Report, published Sept. 22. The majority of policy makers agreed in September that the the “significant” deterioration in the global risk environment is preventing the central bank from cutting the interest rate even as the inflation outlook may justify such a move, the minutes of the meeting, published on Oct. 5, said.

Growth, Inflation

The central bank last week cut its growth forecast for next year to 0.6 percent from 1 percent, compared with the government’s 1.5 percent projection. The Magyar Nemzeti Bank raised its 2012 inflation estimate to 4.9 percent last week from 4.7 percent, to reflect the impact of tax increases.

Consumer prices rose 3.6 percent from a year earlier in September, unchanged from August, as falling food and service prices outweighed the effect of rising fuel costs.

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.

--With assistance from Kristian Siedenburg in Budapest. Editors: Balazs Penz, Alan Crosby

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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