Bloomberg News

Hungary Will Probably Raise EU’s Highest Rate on IMF Delay

January 24, 2012

(Updates markets in sixth paragraph, adds analyst comment in seventh.)

Jan. 24 (Bloomberg) -- Hungary will raise the European Union’s highest benchmark interest rate to support local assets as the country’s bailout negotiations remain frozen, a survey of economists showed.

The Magyar Nemzeti Bank will today raise the benchmark two- week deposit rate by a half-point for a third month to 7.5 percent, according to 15 of 21 economists surveyed by Bloomberg. Five predicted a quarter-point increase and one forecast no change. The decision will be announced at 2 p.m. in Budapest.

Hungary is trying to revive bailout talks that broke down last month over a central bank law that the International Monetary Fund and the EU said threatens monetary-policy independence. Speculation that the talks may collapse pushed the forint to a record low against the euro earlier this month. Prime Minister Viktor Orban’s pledge to change legislation to satisfy the 27-member EU helped local assets pare losses.

“We expect the central bank to deliver another 50 basis- point rate hike” because “risk premia have remained high and markets have remained concerned about economic-policy risks,” economists from Intesa Sanpaolo SpA’s CIB Bank unit, including Sandor Jobbagy, said by e-mail. “Once the deal with the IMF and the EU is on track, further tightening may not be necessary.”

Conciliatory Rhetoric

Orban’s conciliatory rhetoric sent the forint, the worst- performing currency in the world in the past six months, rallying 6.1 percent against the euro since falling to a record low of 324.24 on Jan. 5.

The currency weakened 0.3 percent to 300.8 per euro by 9 a.m. in Budapest. The yield on 10-year government bonds fell to 9.3 percent from 10.7 percent on Jan. 5. The cost of insuring state debt against default dropped to 592 basis points on Jan. 23 after reaching a record 735 on Jan. 5.

“The probability of a 50 basis-point hike is much lower than before,” Peter Attard Montalto, a London-based economist at Nomura International Plc said in a report, adding that policy makers may decide to pause this month as they await data on the effects of this year’s tax and duty changes. An increase to 7.5 percent is still the most likely, he said.

Hungary’s rate increases contrast with the Romanian central bank, which has lowered borrowing costs twice in the past three months by a cumulative half-point to 5.75 percent. Romania agreed on a 5 billion-euro ($6.5 billion) precautionary program for two years with the IMF last March.

Czech, Polish Rates

The Ceska Narodni Banka in Prague has left its two-week repurchase rate unchanged at a record-low 0.75 percent since May 2010, a quarter-point below the European Central Bank’s main refinancing rate. Poland left its benchmark rate unchanged at 4.5 percent for a sixth meeting on Jan. 11.

Hungarian forward-rate agreements, used to bet on three- month interest costs in one month, fell to 7.9 percent from 8.4 percent on Jan. 6, the highest since July of 2009. The Budapest Interbank Offered Rate, to which the FRAs settle, traded at 7.3 percent.

Hungary is ready to change its central bank bill and other laws because starting talks on an IMF loan is more important for the government than engaging in a legal battle with the European Commission, Orban told reporters in Budapest Jan. 20.

He will meet European Commission President Jose Manuel Barroso today in Brussels to outline solutions to the EU executive’s concerns. The commission threatened on Jan. 17 to file a lawsuit against Hungary because of the central bank law, moves to force hundreds of judges into retirement by cutting their pension age and a plan to dismiss the data protection ombudsman after an overhaul of his office.

‘Very Important’

“The meeting is very important,” Mihaly Varga, Orban’s chief of staff, told TV2 in an interview yesterday. “In all three issues, the Hungarian government will make flexible negotiating proposals.”

Hungary, which became the first EU country to receive an IMF-led bailout in 2008, shunned fresh aid in 2010 when Orban became prime minister. He reversed his policy last year when the state started struggling to raise funds at debt auctions, the forint plummeted and the country’s sovereign-credit grade was cut to junk.

Hungary has become a test case for democratic principles and economic-policy rules in the EU, forcing the commission to make good on a pledge to use all its powers to enforce the bloc’s norms. The country, which isn’t part of the 17-nation euro area, risks compounding the two-year-old European debt- crisis centered on the single currency.

Central Bank Signal

Hungary’s public debt rose to 83 percent of gross domestic product at the end of the third quarter, the highest in the region. It compares with about half that ratio for neighboring Slovakia, which joined the euro in 2009.

The central bank last month said it may have to raise the main interest rate further if risk perception deteriorates “substantially.” Five policy makers backed an increase to 7 percent in December while two -- Ferenc Gerhardt and Gyorgy Kocziszky -- supported a quarter-point advance to 6.75 percent, according to the minutes of the meeting published on Jan. 11.

Gerhardt and Kocziszky were two of four outside members of the rate-setting Monetary Council appointed last year by a parliamentary committee dominated by lawmakers belonging to the ruling party.

“Increasing division in the Monetary Council might prevent a 50 basis-point hike and result in a 23 basis-point hike instead,” Gyula Toth, a strategist at UniCredit SpA in Vienna, said in a report before the rate decision.

--With assistance from Kristian Siedenburg in Vienna. Editors: Andrew Langley, Alan Crosby

To contact the reporters 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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