Bloomberg News

Hungary to Cut Interest Rate to 6.50% by Year-End

July 26, 2012

(Corrects interest rate forecast in headline, second and fifth paragraphs.)

Hungary’s central bank will cut its benchmark interest rate to the lowest level since December 2011 by the end of this year as the economy is set to slide into recession, according to a survey of economists.

The Magyar Nemzeti Bank will lower the two-week deposit rate to 6.50 percent from 7 percent by end-2012, with policy makers cutting the rate by half a percentage point in the fourth quarter, according to the median estimate of 23 economists surveyed by Bloomberg. The economy will shrink 0.8 percent this year, compared with a previous projection for a contraction of 0.2 percent, the poll showed.

Hungary has kept interest rates unchanged for seven months as aid negotiations stalled and the inflation outlook worsened. Talks with the International Monetary Fund and the European Union restarted last week and the Cabinet hopes to seal an agreement by the end of autumn, Mihaly Varga, the country’s chief bailout negotiator said today.

The forint, which gained 10.5 percent against the euro this year as investors speculated that Hungary will obtain an IMF bailout, rallied 1.2 percent to 285.06 per euro at 12:58 p.m. in Budapest after European Central Bank President Mario Draghi said policy makers will do whatever is needed to preserve the euro. The yield on the government bond maturing in 2022 declined 12 basis points to 7.63 percent.

The Magyar Nemzeti Bank will cut borrowing costs to 6 percent by the end of June 2013 and keep it at that level for the rest of the year, according to the survey.

Hungary, which introduced special taxes on several industries and nationalized private pension fund savings to narrow its budget deficit to below an EU limit of 3 percent of gross domestic product, faces a 75 percent risk of slipping into recession over the next 12 months, the survey showed.

The budget shortfall is forecast to be 3 percent of GDP in both 2012 and 2013.

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

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


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