Bloomberg News

Hungary Holds Interest Rate at EU’s Highest for 6th Month

June 26, 2012

Hungary’s central bank left its benchmark interest rate at the European Union’s highest level as a surging forint and a looming recession balanced concern over the fastest inflation in the 27-member bloc.

The Magyar Nemzeti Bank voted “overwhelmingly” to keep the two-week deposit rate at 7 percent today for a sixth month, after considering a proposal for a quarter-point cut, President Andras Simor told reporters in Budapest. That matched the forecast of all 27 economists in a Bloomberg survey.

The government and central bank last week agreed on amendments to a central bank law to unblock bailout talks, stalled for seven months as lenders including the International Monetary Fund said the legislation threatened monetary-policy independence. Progress toward aid talks, along with the election of pro-bailout parties in Greece this month, helped the forint rally.

“The council will consider a reduction in interest rates if Hungary’s risk premium falls persistently and substantially and the outlook for inflation improves,” the rate-setting Monetary Council said in a statement.

Forint Strengthens

The forint rose 4.7 percent against the euro in the past month, the best performance in the world after the New Zealand dollar. It gained 0.6 percent to 286.17 by 3:33 p.m. in Budapest.

The cost of insuring against non-payment on Hungary’s debt with credit-default swaps for five years fell to 527 basis points from 625 basis points on June 1. The yield on the 10-year government bond fell a full percentage point in the period to 8.1 percent today.

Central banks across Europe are weighing the effects of the sovereign-debt crisis with slowing growth and the need to narrow budget deficits. The European Central Bank and Poland both left interest rates on hold on June 6, while Czech policy makers will lower borrowing costs to a record-low 0.5 percent on June 28, according to 20 of 24 economists surveyed by Bloomberg.

The central bank today cut its gross domestic product forecast for this year and 2013 and boosted its inflation estimate for next year. The economy will fall into a recession this year, contracting 0.8 percent, before expanding 0.8 percent next year, the central bank said in a preview of its June 28 Inflation Report. The previous forecast was for 0.1 percent growth in 2012 and a 1.5 percent advance in 2013.

Economic Forecasts

The inflation rate may average 5.3 percent this year and 3.5 percent in 2013, the Magyar Nemzeti Bank said. The previous forecasts were 5.6 percent for 2012 and 3 percent in 2013.

Consumer-price growth may still slow to the central bank’s 3 percent target by the end of 2013, Simor said. Policy makers will make “every effort” to prevent second-round effects of tax increases to boost inflation expectations, the Monetary Council said.

Hungary’s inflation, the fastest in the EU, unexpectedly slowed in May when consumer prices rose 5.3 percent from a year earlier after a 5.7 percent increase in April.

The Cabinet approved plans to tax on banking, energy, telecommunications and insurance services May 9 to allay EU concern that its budget was unsustainable and to unfreeze grants from the trading bloc.

To contact the reporter 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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