Bloomberg News

Hungary May Lower Borrowing Costs Early Next Year, Simor Says

April 11, 2012

Hungary’s central bank may cut the European Union’s highest benchmark interest rate in early 2013 if the nation’s risk assessment and inflation outlook improve “significantly,” Governor Andras Simor said.

“Interest rates may be lowered at the start of next year alongside a significant decrease in risk premia and an improvement in inflation processes,” Simor said today in a speech in Budapest. Rates may need to remain steady for “several quarters” to reach the bank’s 3 percent inflation goal, he added.

The Magyar Nemzeti Bank left the two-week deposit rate at 7 percent for a third month in March and raised its inflation forecast for this year and next. Policy makers were in “broad consensus” that the deteriorating outlook for inflation and increased perceptions of risks warranted “greater caution” in monetary policy for months to come, according to the minutes of the March meeting published today.

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.

Dependent on IMF

The rate-setting Monetary Council unanimously agreed that perceptions about the economy were highly dependent on news about the government’s planned agreement with the EU and the IMF, according to the minutes.

The forint has weakened 1.1 percent against the euro this month, extending the currency’s slump to 3.8 percent since reaching its strongest level in five months on Feb. 21 as investors question the government’s commitment to an IMF deal. The currency traded at 297.74 per euro at 4:55 p.m. in Budapest.

Hungary’s failure to reach a financing agreement with the international institutions would entail “significant” financing risks and would hurt the economy, Simor said.

“We continue to believe a scenario without an IMF agreement may yield significant financing risks and real economic costs,” Simor said, adding that current financing costs were “unsustainable” in the long term.

The central bank last month raised its consumer-price forecast for 2012 to 5.6 percent from a previous estimate of 5 percent and for 2013 to 3 percent, rather than a 2.6 percent earlier projection.

Hungary may reach its inflation goal in early 2013, Simor said.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net


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