Bloomberg News

Hungary Has Room to Cut Interest Rates, Policy Makers Say

November 06, 2012

Hungary’s central bank has room to lower the European Union’s highest benchmark rate as the country’s risk assessment improves and the inflation target remains within reach on the policy horizon, central bankers Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said.

Interest-rate reductions must be cautious and gradual as policy makers seek to move along with market sentiment and avoid forcing anything, Bartfai-Mager said in an interview in Budapest yesterday. Cuts shouldn’t exceed a quarter-point at a time, Gerhardt said in the same interview, which included three of the four non-executive rate setters who have driven policy easing since August. The country’s “equilibrium interest rate” is 4.5 percent to 5 percent, Gerhardt said.

“Favorable developments in risk premiums and the exchange rate are persistent based on currently available information” and provide maneuvering room for monetary policy, Bartfai-Mager said. Accelerating inflation is primarily fueled by first-round effects, which central banks typically overlook, she said.

The Magyar Nemzeti Bank on Oct. 30 reduced the two-week deposit rate for a third month by a quarter-point to 6.25 percent as concern about a recession outweighed the EU’s fastest inflation and uncertainty about obtaining international aid. Policy makers had a “narrow majority” for the cut over a proposal for no change, MNB President Andras Simor said.

Inflation, the fastest in the EU, accelerated to 6.6 percent in September, the quickest since July 2008, as fuel prices rose 2.8 percent and food costs increased 0.6 percent.

Forint, CDS

The forint was little changed at 282.62 per euro as of 11:01 a.m. in Budapest. It has gained 11.5 percent against the euro this year, the best performance in the world, as investors bet Hungary will obtain an International Monetary Fund loan.

The cost of insuring Hungarian debt against default for five years using credit-default swaps was 283 basis points, compared with a 2 1/2 year low of 235 on Oct. 17, data compiled by Bloomberg show. Yields on the benchmark bonds maturing in 2017 rose 2 basis points, or 0.02 percentage point, to 6.34 percent, compared with a 2 1/2 year low of 6.23 percent on Oct. 18.

“Until now, there has been no indication at all from the market that the Monetary Council cannot get away with continuing this strategy thanks to continued bond market inflows,” Peter Attard Montalto, a London-based analyst at Nomura International Plc said in an e-mail yesterday.

Economic Outlook

Hungary is in its second recession in four years as the euro crisis curbs demand for the country’s exports while government measures to contain the budget deficit crimp domestic lending. The Cabinet last month cut its projection to a contraction of 1.2 percent this year from 0.1 percent growth and predicts an expansion of 0.9 percent in 2013, compared with a previous estimate of 1.6 percent.

Corporate lending probably won’t recover in the next two years, exacerbating the recession as banks’ profit outlook is “distressed” by deteriorating loan quality and taxes, the central bank said in a report yesterday.

The central bank will consider further interest rate cuts if data in the “coming months confirm that the improvement in financial-market sentiment persists” and the medium-term outlook for inflation remains consistent with the 3 percent target, the Monetary Council said Oct. 30.

“The economy is being hit with repeated cost shocks and we constantly have to re-examine” the impact, Bartfai-Mager said. “These gradual small steps provide an opportunity to decide whether to proceed when we can and to pause when that moment comes -- not to finish the cycle, but to pause and see how trends are developing.”

‘Equilibrium’ Rate

An “equilibrium” interest rate would support economic growth and control inflation, Gerhardt said, adding that it would be “extremely brave” to forecast anything in advance.

The European Central Bank last month left its main interest rates unchanged at a record-low 0.75 percent. The Czech central bank cut its main interest rate to a record-low 0.05 percent on Nov. 1 while the Polish central bank, which surprised the market with a rate increase in May, on Nov. 7 will cut its benchmark to 4.5 percent from 4.75 percent, according to 34 of 35 economists in a Bloomberg survey.

Hungary’s central bank pressed ahead with the third quarter-point cut since August as the four non-executive members outvoted Simor and his two deputies on two occasions.

Professional Disputes

It’s “too big a leap” to divide the Monetary Council into inflation and growth-oriented factions, Bartfai-Mager said, adding that it’s as an “oversimplification and needless” to presume there is a political divide, because the disputes are professional.

Disputes that occur in the council are professional and concern inflation scenarios, Kocziszky said.

Talks on international aid remain deadlocked one year after the government turned to the IMF and the EU because of a disagreement over budget measures. The IMF isn’t currently planning to resume its mission to Hungary, Gerry Rice, a spokesman for the lender, said Nov. 1.

The government is still seeking a financial safety net from the IMF, Peter Szijjarto, a state secretary in the prime minister’s office, said Oct. 4, adding that the Cabinet won’t give up the “fundamental points” of its economic policies.

“For the past 12 months we have recommended and supported the striking of an IMF agreement and we haven’t changed that despite the favorable risk assessment in the world,” Bartfai- Mager said. “In my personal decisions I presume that there will be a deal between Hungary and the IMF/EU.”

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Andras Gergely in Budapest at agergely@bloomberg.net

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


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