Bloomberg News

Hungary May Raise Rates to Stem Forint Slide on Junk Debt Grade

November 29, 2011

Nov. 29 (Bloomberg) -- Hungary’s central bank will raise its benchmark interest rate for the first time since January to bolster the forint after the country lost its investment grade at Moody’s Investors Service, a survey of economists showed.

The Magyar Nemzeti Bank will increase the two-week deposit rate to 6.5 percent from 6 percent today, according to the median estimate of 23 economists in a Bloomberg survey taken after the Nov. 24 downgrade. The decision will be announced at 2 p.m. in Budapest, followed by a news conference at 3 p.m.

The forint fell to its weakest ever against the euro this month and government bond yields soared over 9 percent as the country lost its investment grade at Moody’s after 15 years. That may tip the scale for policy makers, who have balanced shielding the currency against slowing economic growth.

“A rate hike looks increasingly likely in an effort to stem currency weakness and its knock-on effects on financial stability in the financial, government and household sectors,” Nick Chamie, global head of emerging markets at RBC Capital Markets in Toronto, wrote in an e-mail.

The forint is the world’s worst-performing currency against the euro in the second half of the year, having weakened 14 percent. It fell to a record 317.92 on Nov. 14 after Standard & Poor’s threatened to cut the country’s debt rating to junk, forcing the government to seek assistance from the International Monetary Fund and the European Union.

The Hungarian currency’s weakness increases payments on foreign-currency mortgages, which account for two-thirds of housing loans.

S&P, Moody’s, Fitch

While S&P postponed a decision on the credit rating until February, Moody’s downgraded Hungary’s government bond rating on Nov. 24 by one step to Ba1, maintaining a negative outlook, citing risks to budget-deficit and public debt targets. Fitch Ratings said on Nov. 18 an IMF agreement would reduce pressure on Hungary’s rating, adding that a deal remained a “long way off.”

Hungary failed to sell a planned 50 billion forint ($216 million) of debt yesterday, auctioning 35 billion forint of 6- week Treasury bills as yields soared to 7.24 percent from 6.63 percent at the previous auction of the same maturity on Nov. 21.

Forward-rate agreements fixing three-month interest in one month traded at 7.05 percent at 6:45 p.m. in Budapest yesterday. Three-month FRA traded at 7.45 percent. The three-month Budapest Interbank Offered Rate, to which the FRAs settle, traded at 6.76 percent, showing expectations the main interest rate will rise a quarter-point today and 0.5 percentage point or more by February.

Seeking Assistance

Prime Minister Viktor Orban unexpectedly turned to the IMF on Nov. 18 to seek a backstop that doesn’t entail a loan or conditions on economic policy, reversing 18 months of shunning the lender. After the downgrade by Moody’s, Economy Minister Gyorgy Matolcsy said that Hungary may have to accept conditions for a credit line. The Cabinet wants to agree with the IMF and the EU by the “first few months” of next year, he said.

The government wants to cut the highest debt burden among the EU’s eastern members from 81 percent of economic output last year and aims to keep the budget deficit within 2.5 percent of gross domestic product next year.

Orban has relied on one-off measures, including the effective nationalization of $13 billion of mandatory private pension-fund assets and extraordinary industry taxes to control the budget, whose deficit reached 193 percent of the Cabinet’s full-year target at the end of October. The government is also cutting spending and raising taxes to save as much as $4 billion a year by 2013.

‘Gradually Tighten’

Hungary may need to “gradually tighten monetary conditions” to shield the forint from a sustained increase in risk aversion stemming from the euro area’s debt crisis, the central bank said on Nov. 15.

Today’s rate decision will be a test for “dovish” central bank policy makers, elected in March by a committee dominated by the ruling party, who may be reluctant to raise rates more than a quarter point, according to Eszter Gargyan, a Budapest-based economist at Citigroup Inc.

“A 50 basis-point step would be safer to mute depreciation pressures, but we see higher chance for a 25 basis-point hike, given the split in the Monetary Council, which, in our view, may trigger further sell-off,” Gargyan said in a Nov. 25 research note. A basis-point is 0.01 percentage point.

The split in the Monetary Council and the prospect of a rate increase of half a percentage point potentially failing to boost the forint may result in rates remaining unchanged, UniCredit SpA said in an e-mailed note yesterday. Policy makers may reserve their “last bazooka” of elevating borrowing costs by as much as 400 basis points for later, said UniCredit economists Gillian Edgeworth in London and Gyula Toth in Vienna.

“The pressure to hike rates” today “will be sourced from the central bank’s longer-standing three internal members,” Edgeworth and Toth wrote. “But we are not convinced that one of the four remaining members on the Council, appointed by the government, will be willing to support an aggressive rate hike at this stage.”

--With assistance from Kristian Siedenburg in Vienna.Editors: Balazs Penz, Eddie Buckle

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

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


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