Dec. 20 (Bloomberg) -- The forint gained a second day after Hungary’s central bank increased the European Union’s highest benchmark interest rate and signaled it may tighten further amid a dispute with government.
Hungary’s currency strengthened as much as 1.2 percent and traded 0.8 percent stronger at 300.9 per euro by the close in Budapest. Hungary’s benchmark 3-year government bonds advanced, cutting the yield nine basis points to 8.45 percent. The Magyar Nemzeti Bank raised the benchmark two-week deposit rate by a half-point for a second month to 7 percent, matching the estimate of 15 of 22 economists surveyed by Bloomberg.
The central bank last month raised the benchmark rate for the first time since January and said it was ready for further increases if warranted by the outlook for inflation and risk perception. The forint weakened on Dec. 16, when the EU and the International Monetary Fund interrupted talks with Hungary after Prime Minister Viktor Orban moved to curb the central bank’s independence.
“With the talks on IMF support on hold, one of the few leverages the central bank for stabilization of domestic markets is the benchmark interest rate,” Aurelija Augulyte, a Copenhagen-based economist at Nordea Bank AB, wrote in an e-mail after the central bank decision. “They may continue to hike early next year if the tensions persist.”
The central bank also cut its estimate for next year’s gross domestic product growth to 0.1 percent from a previous 0.6 percent latest and said that its Report on Inflation “assumes” higher interest rates in the coming period.
The decision to raise interest rates “impedes Hungary’s healthy economic growth and runs against EU trends,” the Economy Ministry in Budapest said in an e-mailed statement after the decision.
The Hungarian government’s reaction is “unacceptable” and shows the ministry “doesn’t understand the concept of central bank independence,” Andras Simor, the bank’s president, said at a press conference in Budapest today.
“It would be premature to rule out further, more aggressive tightening over the coming months” as the central bank and government remain “at loggerheads” and talks with the IMF have “seemingly broken down,” William Jackson, a London- based economist at Capital Economics, wrote in a research report.
The benchmark BUX stock index rose 0.8 percent to 17,650.43 after falling as much as 1 percent earlier today. Stocks rallied in Europe and the U.S. after a report showed that German business confidence unexpectedly rose for a second month and as U.S. housing starts rose to the highest level in a year.
--Editors: Linda Shen, Tim Farrand
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