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Simor Signals Steady Hungarian Rates as IMF Delay Raises Risk

March 27, 2012

Hungary’s central bank is poised to keep the European Union’s highest main interest rate unchanged for several quarters as the government’s failure to start talks on a bailout loan damages the country’s risk assessment.

The Magyar Nemzeti Bank left the two-week deposit rate at 7 percent for a third month yesterday and raised its inflation forecast for this year and next. Policy makers discussed a quarter-point rate increase as well as lowering borrowing costs by 25 basis points, central bank President Andras Simor said.

“The base rate needs to be kept unchanged at this level for several quarters to reach the inflation target, according to projections,” Simor said, referring to the central bank’s latest economic outlook, published yesterday. Hungary would be able to lower rates “if Hungary’s risk assessment markedly improved or if no deterioration in inflation risks occurred.”

Prime Minister Viktor Orban, who’s battling to avert a recession, asked the EU and the International Monetary Fund for a bailout in November as the forint fell to a record low and the country’s credit rating was cut to junk. Four months later, talks have yet to start as Hungary has failed to show that independent institutions such as the central bank are free of government influence.

The forint has weakened 1.8 percent against the euro since reaching its strongest level in five months on Feb. 21 as investors question the government’s commitment to an IMF deal. The currency has advanced 8 percent this year after a 15 percent decline in the second half of 2011.

‘Intensified Pressure’

“The delay of the talks and the risk of intensified pressure on local assets ahead of the deal will likely deliver unchanged rates until late 2012 when inflation starts to decline and a loan agreement is likely to be finalized or within reach,” Eszter Gargyan, a Budapest-based economist for Citigroup Inc. (C:US) wrote in an e-mailed note yesterday.

The cost of insuring state debt against non-payment for five years using credit-default swaps rose to 544 basis points on March 23, the highest close in a month, according to data provider CMA, which is owned by CME Group Inc. (CME:US) and compiles prices quoted by dealers in the privately negotiated market. The swaps traded at 535 basis points yesterday.

The central bank, which targets 3 percent inflation, raised its consumer-price forecast for this year and next. It sees the 2012 rate at 5.6 percent, up from a previous estimate of 5 percent, and at 3 percent next year, rather than a 2.6 percent earlier forecast.

‘Doesn’t Justify’

“The current inflation outlook doesn’t justify a rate increase, however, a deterioration in international investor (TII) sentiment may bring one about,” said Istvan Horvath, director at the Budapest investment management unit of KBC Groep NV. (KBC)

Any rate cut will hinge on the inflation outlook and an improvement in investors’ perception of risk associated with Hungary, Simor said yesterday, adding that the signing of the financing agreement and its timing are factors influencing monetary policy.

Some amendments made to Hungary’s disputed central bank bill, one of the issues blocking aid talks, show progress while “on some matters there has been no progress at all and on some, what’s happening isn’t exactly what’s needed in our opinions” Simor said.

Hungarian rates contrast with record low borrowing costs elsewhere in eastern Europe. Czech policy makers have kept the benchmark rate at 0.75 percent, a quarter-point less than the European Central Bank’s main rate, since May 2010. Romania has cut rates three times since November to a record 5.5 percent to guard against Europe’s debt crisis, while Poland left rates at 4.5 percent for a ninth month on March 7.

Growth Effect

Polish central bank Governor Marek Belka in a March 26 interview signaled he’s prepared to wait before raising interest rates to avoid the risk of having to reverse the move should the economy slow.

Hungary’s economy will expand 0.1 percent this year, unchanged from a previous forecast, and will grow 1.5 percent in 2013, rather than an earlier projection of 1.6 percent, the bank said in its updated Inflation Report yesterday.

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 Feb. 20. The Cabinet’s estimate ranges between stagnation and 0.5 percent growth.

Simor also said the country needed an IMF agreement as soon as possible to help lower borrowing costs. The yield on the 10- year government bond rose to 9.1 percent on March 23, a two- month high, before dropping to 8.82 percent yesterday, according to generic prices compiled by Bloomberg.

Orban’s Policies

Hungary was the first EU nation to obtain an IMF bailout in 2008 after investors sold the assets of the bloc’s most-indebted eastern member. Orban shunned renewing the aid after coming to power in 2010, pursuing what he called “unorthodox” economic policies that 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.

Forward-rate agreements, used to bet on three-month interest rates in three months’ time, traded less than 10 basis points above the Budapest Interbank Offered Rate, indicating no change in rates next quarter. Nine-month FRAs traded 28 basis points below Bubor, signaling a quarter-point reduction by year end.

“At the moment, we still think monetary easing may come sometime in the second half of 2012, but uncertainty is high about the timing,” Zoltan Arokszallasi, an economist at Erste Group Bank AG (EBS) in Budapest, wrote in a note to clients yesterday.

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

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


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