Bloomberg News

Hungary to Hold EU’s Highest Interest Rate on IMF Delay

March 27, 2012

Hungary’s central bank will probably refrain from cutting the European Union’s highest benchmark interest rate because of a delay in obtaining an International Monetary Fund loan.

The Magyar Nemzeti Bank will leave the two-week deposit rate at 7 percent for a third month today, according to all 26 economists surveyed by Bloomberg News. Central bank President Andras Simor will explain the decision at 3 p.m. in Budapest.

Prime Minister Viktor Orban, battling to avert a recession, asked for a bailout from the EU and the IMF in November as the forint fell to a record low against the euro and the country’s credit grade was cut to junk. Talks have yet to start as Hungary has failed to show that independent institutions such as the central bank are free of government influence.

“It is pretty clear to us that the EU-IMF assistance package is a key determinant of interest rate policy,” Pasquale Diana, a London-based economist at Morgan Stanley (MS), said in an e- mailed report yesterday, adding that June was the earliest date for an agreement. “It now looks to us as though the conditions for rate cuts to materialize will be in place later than we previously thought.”

The forint has weakened 1.5 percent against the euro since rising to the strongest in five months on Feb. 21 as investors questioned the government’s commitment to an IMF accord. It appreciated 0.3 percent to 290.6 per euro by 11:34 a.m. in Budapest. The currency strengthened 8.4 percent this year after falling 15 percent in the second half of last year. A second day of gains in the state’s benchmark 3-year bond cut yields by 6 basis points, or 0.06 percentage point, to 8.552 percent.

Credit-Default Swaps

The cost of protecting Hungarian debt against non-payment for five years using credit-default swaps rose to a month-high 544 basis points on March 23, according to data provider CMA, which is owned by CME Group Inc. (CME) and compiles prices quoted by dealers in the privately negotiated market. The spread fell to 535 basis points today.

Hungary was the first EU country to obtain an IMF bailout in 2008 after investors sold the assets of the most-indebted eastern member of the EU. Orban shunned renewing the aid after coming to power in 2010, saying he wanted to conduct an “unorthodox” economic policy that has included nationalizing private-pension funds and forcing lenders to take losses on foreign-currency loans.

OTP Bank Nyrt., the country’s largest lender, reported its first quarterly loss in three years in the three months ended Dec. 31. Foldhitel es Jelzalogbank Nyrt., the nation’s second- largest mortgage lender, had its second consecutive quarterly loss in the same period.

‘Crucially Important’

The central bank kept borrowing costs unchanged last month after considering cutting them for the first time in a year as a surge in the forint and lower credit risk outweighed stalling bailout talks.

An IMF loan for Hungary is “crucially important” for the government to obtain “as soon as possible,” rate-setters argued last month, according to the minutes of the Feb. 28 meeting, published on March 14. Policy makers urged “particular care” on monetary policy before six rate-setters backed unchanged rates and one supported a cut to 6.75 percent.

Forward-rate agreements, used to bet on three-month interest rates at the end of June traded less than 5 basis points above the Budapest Interbank Offered Rate, indicating no change in borrowing costs in the next quarter. That compares with nine-month forward-rate agreements trading 33 basis points below the Bubor, signaling a quarter-point reduction by the end of the year.

‘Upside Surprise’

A jump in Hungary’s inflation rate to almost double of the central bank’s target may add to arguments against a rate cut, according to Eszter Gargyan, a Budapest-based economist at Citigroup Inc. Consumer prices in February rose 5.9 percent from a year earlier, the fastest pace in the EU, driven by fuel and household energy costs.

“Although monetary policy is primarily driven by the evolution of the risk premium, an upside surprise in inflation has confirmed our view that there is no room for rate cuts before” the fourth quarter, Gargyan said in a March 22 report.

Hungary’s delay in cutting interest rates contrasts with other emerging-market central banks in eastern Europe.

The Czech central bank has kept the benchmark two-week repurchase rate at a record-low 0.75 percent, a quarter-point less than the European Central Bank’s main rate, since May 2010. The Romanian central bank cut the benchmark interest rate three times since November to 5.5 percent, the lowest ever, as policy makers seek to buoy the economy as Europe grapples with a debt crisis. Poland’s central bank left its benchmark interest rate at 4.5 percent for a ninth month on March 7.

Subdued Economy

In Hungary, a subdued economy will probably keep price growth in check in the medium-term, reducing the inflation rate to policy makers’ target next year, economists at CIB Bank Zrt., a unit of Intesa Sanpaolo SpA (ISP), said in a March 23 e-mail.

Gross domestic product may contract 0.6 percent this year, according to a report published on March 13 by the Organization for Economic Cooperation and Development. The European Commission forecasts the economy will shrink 0.1 percent, the only one of the bloc’s non-euro members expected to not grow this year.

The government has scaled back its projection for economic growth this year, maintaining that the country will probably avoid a recession, Mihaly Varga, Orban’s chief of staff, said on Feb. 20. The Cabinet’s estimate ranges between stagnation and 0.5 percent growth.

“The economy continues to teeter on the edge of a recession, meaning that fundamental factors don’t justify the change in interest-rate levels,” CIB Bank analysts including Sandor Jobbagy, said in the e-mail.

To contact the reporter on this story: Zoltan Simon in Budapest at

To contact the editor responsible for this story: Balazs Penz at

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