The forint headed for the biggest two-day decline in more than three months after Hungary’s central bank unexpectedly lowered the European Union’s highest benchmark interest rate yesterday to support the economy.
Hungary’s currency depreciated 0.7 percent to 282.84 per euro by 10:06 a.m. in Budapest, extending its two-day decline to 1.8 percent, the steepest drop on a closing basis since the two days through May 23. The government’s benchmark three-year bonds slumped, lifting yields three basis points, or 0.03 percentage point, to 6.805 percent.
The Magyar Nemzeti Bank lowered the two-week deposit rate by 25 basis points to 6.75 percent. Of 18 economists in a Bloomberg survey, 17 projected the bank would leave rates unchanged while Lars Christensen from Danske Bank A/S (DANSKE) forecast the cut. The Monetary Council voted to ease monetary policy by a “tight” margin even as Hungary faces delays in meeting its inflation goal, MNB President Andras Simor told reporters yesterday.
“The move erodes the central bank’s credibility and puts its anti-inflation commitment into question,” Zsolt Kondrat, a Budapest-based economist at Bayerische Landesbank’s MKB Bank unit, wrote in a research report today. “The Monetary Council started a risky game.”
Inflation, the fastest in the EU, accelerated to 5.8 percent in July from 5.6 percent in June, drifting further from the central bank’s 3 percent target. The pace of consumer-price increases may slow to the goal in 2014, Simor said last month.
Forward-rate agreements used to wager on interest rates in three months dropped for a second day to 6.445 percent, the lowest since September. The FRAs traded 70 basis points below the Budapest Interbank Offered Rate, the biggest spread in almost three years and signaling expectations for at least a half-point rate cut. A basis point is 0.01 percentage point.
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