Bloomberg News

Hungarian Rates to Rise Further as Junk Grade Risks Forint

November 30, 2011

(Updates with economist comment in fourth paragraph, forint in fifth, rate expectations in sixth, producer prices in ninth.)

Nov. 30 (Bloomberg) -- Hungarian interest rates may rise further from the European Union’s highest level as policy makers seek to protect the forint from the effects of the country’s debt being downgraded to junk, the central bank said.

The Magyar Nemzeti Bank is ready to increase the two-week deposit rate after boosting it to 6.5 percent from 6 percent yesterday, central bank President Andras Simor told reporters in Budapest yesterday. Forward-rate agreements, or FRAs, rose, indicating investor expectations for higher borrowing costs.

The first rate increase since January failed to boost the forint, which fell to its weakest ever against the euro this month and helped push the government to seek aid from the International Monetary Fund and the European Union. Hungary losing its investment grade at Moody’s Investors Service tipped the scale for policy makers, who had balanced shielding the currency against slowing economic growth.

“Further hikes are unavoidable as longer term yields and FRAs indicate,” Janos Samu, an economist at Concorde Securities in Budapest, wrote in an e-mail today. “The currently priced-in interest rate hikes indicate a base rate of 7.5 percent by January, which may be enough in our view to stem a further slide in the forint provided an EU-IMF deal can be struck by that time.”

Forint Strengthens

The forint, the world’s worst-performing currency against the euro since June 30, rose 0.9 percent to 306.72 per euro at 3:38 p.m. in Budapest today. The yield on the five-year government bond fell 54 basis points to 8.77 percent at 3:41 p.m. in Budapest, compared with the 9.57 percent reached on Nov. 25, the highest since July 2009.

Forward-rate agreements fixing three-month interest in one month traded at 7.22 percent, compared with 7.45 percent for the three-month FRA. The three-month Budapest Interbank Offered Rate, to which the FRAs settle, traded at 6.99 percent, showing expectations for rising interest rates.

Polish and Czech central bankers this month left their benchmark rates unchanged at 4.5 percent and 0.75 percent, respectively. Romania on Nov. 2 unexpectedly cut its main interest rate to a record-low 6 percent from 6.25 percent.

‘Persistently Unfavorable’

Hungary is ready to increase the benchmark rate further if the outlook for inflation and the country’s risk perception remain “persistently unfavorable,” the Monetary Council said in a statement released after the rate decision.

The forint’s depreciation is a “threat” to the central bank’s 3 percent inflation target, it said. Consumer prices rose 3.9 percent in October from a year earlier, the fastest pace in five months. Producer prices, which indicate future inflation trends, rose by 7 percent in October from a year earlier, the most in 10 months, as oil-refining costs soared.

Investors are shunning riskier bonds and demanding higher yields as European leaders grapple with the euro area’s crisis, which started in Greece more than two years ago and threatens to infect weaker economies.

The “outcome of the meeting and the statement are a green light to higher rates,” Guillaume Salomon, a London-based economist at Societe Generale SA, said by e-mail yesterday. “Only a complete turnaround in the eurozone crisis for the better would change this outlook.”

‘Long Way’

The forint 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 IMF and the EU.

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.”

Prime Minister Viktor Orban 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.

Debt Payments

The nation’s foreign-currency debt maturing next year will soar to 1.37 trillion forint ($5.9 billion), a 48 percent increase from this year, the government estimates. That will rise to 1.48 trillion forint in 2013 and peak at 1.65 trillion forint in 2014 as Hungary repays the 20 billion-euro ($26.7 billion) bailout.

Hungary sold a planned 40 billion forint of three-month Treasury bills yesterday at an average yield of 7.32 percent, compared with 6.63 percent at the last sale of the same maturity on Nov. 22. The government failed to sell a planned 50 billion forint of debt on Nov. 28, auctioning 35 billion forint of six- week Treasury bills as yields soared.

Hungary needs an agreement with the IMF and the EU “as soon as possible,” the Monetary Council said. Its size should take into account Hungary’s debt renewal needs, Simor said.

--With assistance from Kristian Siedenburg and Andras Gergely in Budapest. Editors: Balazs Penz, Andrew Langley

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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