Bloomberg News

Hungary to Hold EU’s Highest Rate on IMF Delay, Forint

May 29, 2012

(Corrects number of months in second paragraph.)

Hungary’s central bank will probably keep the European Union’s highest benchmark interest rate unchanged because of a delay in obtaining International Monetary Fund aid and a weak forint amid Europe’s debt crisis.

The Magyar Nemzeti Bank will leave the two-week deposit rate at 7 percent for a fifth month today, according to all 22 economists surveyed by Bloomberg News. A decision is due at 2 p.m. in Budapest, with central bank President Andras Simor to hold a news conference an hour later.

Prime Minister Viktor Orban, battling to avert a recession, asked for a bailout from the European Union 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. The government is delaying the start of talks by “dragging” its feet on changing a disputed central bank law to address IMF concerns, Citigroup Inc. said on May 17.

“The difficult euro-zone backdrop and rather slow progress on the EU-IMF loan negotiations corner the Monetary Policy Council into keeping rates on hold despite evidence of rising downside risks to gross domestic product prospects,” London- based Bank of America economist Raffaella Tenconi said in an e- mail.

Greek Exit

The forint is headed for its biggest monthly slide against the euro since September on speculation about a potential Greek exit from the euro area, which Citigroup economists consider now to be their “base case.” BofA Merrill Lynch strategists estimate that the gross domestic product of the currency area, Hungary’s main export market, would contract 4 percent in the recession that follows, similar to the decline suffered after Lehman’s 2008 collapse.

The forint rose 0.2 percent to 298.75 per euro at 8:35 a.m. in Budapest, paring its drop in May to 4.3 percent. The benchmark BUX stock index has declined 10 percent in the month.

The cost of protecting Hungarian debt against non-payment for five years using credit-default swaps declined to 593.66 today from a month-high of 599 basis points at the end of last week, according to data compiled by Bloomberg.

Risk Perceptions

Monetary policy makers agreed last month that factors affecting risk perceptions were “of key importance,” according to minutes from the April 24 meeting. They urged an agreement with the IMF and EU “as soon as possible” to cut financing risks and stem the withdrawal of foreign funding from local banks.

The European Commission last month approved the start of bailout talks after Orban pledged to change a central bank regulation to ensure monetary-policy independence. Parliament will vote on government amendments today, which fall short of meeting IMF requirements of redressing an “excessive” transfer of power from the central bank governor to the rate-setting Monetary Council, Citigroup said this month after meeting the IMF’s representative in Hungary.

Hungary is refusing to amend disputed parts of the law despite pressure from the European Central Bank and the IMF, Magyar Nemzet reported on May 26, citing unidentified people at the Economy Ministry.

Third Vice President

The government wants the Monetary Council, and not the president of the Magyar Nemzeti Bank, to have authority over foreign-currency reserves despite objections from international institutions, according to the Budapest-based newspaper. The Cabinet also wants to nominate a third vice president at the bank, it said.

Talks may start next month after lawmakers approve amendments to the central bank law, a condition set by the bloc, the Economy Ministry said on May 24.

Forward-rate agreements used to bet on three-month interest rates in nine months traded at 7.08 percent today, 11 basis points below the Budapest Interbank Offered Rate, indicating expectations for no change in borrowing costs in the next three quarters.

The official start of negotiations may bring about a split in the monetary council, Tim Ash, head of the emerging-market research at Royal Bank of Scotland Group Plc in London, said in an e-mail. “The forint will be key and given the European debt crisis, we might see more forint weakness which may persuade the doves to hold fire on rates.”

The government approved taxes on banking, energy, telecommunications and insurance companies this month to allay EU concerns that its budget was unsustainable and to unfreeze grants from the 27-member bloc. The new taxes will boost inflation this year and next, Simor said on April 24, adding that he wasn’t sure the central bank could meet its 3 percent inflation target in 2013.

Inflation Acceleration

Hungary’s inflation, the fastest in the EU, unexpectedly accelerated to 5.7 percent in April on surging fuel and tobacco costs. The central bank in March raised its forecast for this year’s average inflation rate to 5.6 percent from 5 percent, and for 2013 to 3 percent from 2.6 percent.

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

The Czech Republic has kept the benchmark two-week repurchase rate at a record-low 0.75 percent, a quarter-point less than the ECB’s main rate, since May 2010. Romania cut its main rate four times since November to 5.25 percent, the lowest ever, as policy makers seek to buoy the economy as Europe grapples with a debt crisis.

Hungary’s deteriorating growth outlook has turned policy makers more dovish and there may be some who want to cut rates before a final bailout agreement is reached, Eszter Gargyan, economist at Citigroup Inc. in Budapest said in an e-mailed note to clients.

GDP plunged in the first quarter from the previous three months after stagnating in the October-December period. Hungary’s economy may contract 1.5 percent this year, according to a May 22 projection by the Organization for Economic Cooperation and Development. That contrasts with the government’s forecast for a 0.1 percent expansion.

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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