Bloomberg News

Hungary Eyes Fifth Monthly Rate Cut as Forint Plunges

December 18, 2012

Hungary’s central bank, roiled by divisions among policy makers, will cut the European Union’s highest benchmark rate for a fifth month even as the forint dropped to a five-month low, according to a poll of economists.

The Magyar Nemzeti Bank will lower the two-week deposit rate to 5.75 percent from 6 percent, the fifth quarter-point cut in as many months, according to all 19 economists in a Bloomberg survey. The decision will be announced at 2 p.m., followed by a briefing with MNB President Andras Simor at 3 p.m.

Simor, who on Dec. 7 urged the bank to act “much more firmly” against inflation, which slowed to 5.2 percent in November, has been outvoted along with his two deputies in each of the past four rate meetings by non-executive members who want to spur an economy mired in its second recession in four years. The forint’s two-day plunge against the euro to the weakest since July 25 may test policy makers’ resolve to continue monetary easing, Nomura International Plc said.

A cut would “mean the external MPC members are much more risk-loving than we first thought,” Peter Attard Montalto, a London-based economist at Nomura, said in a report today. A cut is still likely “even if we assign less probability to the move” than earlier, he said.

Forint Plunges

The forint dropped 1.6 percent in the past two days and traded at 288.44 per euro by 10:14 a.m. in Budapest, with traders and strategists citing reports of government plans to apply greater pressure for monetary easing among the reasons for the drop. The weakening pared the forint’s gain this year to 9.2 percent, the second-biggest rise after the Polish zloty.

The four non-executive policy makers, appointed by Prime Minister Viktor Orban’s ruling party in 2011, have pointed to the resilience of the currency and falling risk premium for supporting monetary easing. They have also argued that the inflation rate may drop to the bank’s target in 2014 as cost shocks from energy and food prices fade.

Hungary on Dec. 13 sold 2028 bonds at an average yield of 6.31 percent, the lowest in seven years. Credit-default swaps, measuring the cost of insuring Hungarian debt against non- payment for five years, traded at 289 basis points yesterday, compared with 321 basis points a month ago.

Forward-rate agreements used to bet on three-month interest rates in three months traded at 5.39 percent today. That’s 61 basis points below the three-month Budapest Interbank Offered Rate, indicating a benchmark rate of 5.25 percent to 5.5 percent in March.

Regional Easing

Hungary’s rate cuts follow those of central banks in eastern Europe, where price growth is slower. The Czech central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point less than the euro-area benchmark. Czech inflation in November was 2.7 percent from a year earlier.

Central bankers in Poland, where the inflation rate was within the bank’s tolerance range last month at 2.8 percent, may cut its benchmark interest rate for a third month in January from 4.25 percent, policy maker Jerzy Hausner said Dec. 12. Romania kept borrowing costs steady at 5.25 percent in November with price growth at 4.56 percent.

Hungary needs a main rate of 6.75 percent to slow inflation to its target by the second half of 2014, the MNB said in its September forecast. The MNB will publish new inflation and gross domestic product forecasts today at 3 p.m.

Depreciation Risk

Rate cuts in countries like Hungary, which are indebted in foreign currencies, may fail to stimulate growth by risking currency depreciation and fueling inflation, European Central Bank President Mario Draghi said in Budapest Dec. 7.

Fiscal or monetary stimulus won’t solve Hungary’s growth problem, Simor, whose six-year mandate expires in March, said the same day. He said the government needed to create a predictable policy environment and agree with banks to ease their tax burden to stop a decline in lending.

A government policy turnaround, which the International Monetary Fund has also asked for to boost growth and unlock aid talks more than a year after Hungary asked for a financial safety net, is unlikely to happen after lawmakers last week approved a 2013 budget that relies on keeping extraordinary company taxes businesses blamed for a lack of investment.

That puts Orban, facing elections in 2014, focused on pressuring the central bank for monetary stimulus after Simor leaves his job, according to Luis Costa, an emerging-market strategist at Citigroup Inc. in London. The Cabinet wants a “new strategic alliance” with the central bank with the change of leadership, Economy Minister Gyorgy Matolcsy, mentioned in media reports as a possible successor to Simor, told state radio MR1 on Dec. 15.

“Orban will make sure the central bank will be fully aligned with the government’s policy in 2013, and the reshuffle in the NBH board will be a decisive step toward that goal,” Costa said. “This government is poised to ’force’ rates lower further down in the first quarter” as it looks for a “a lot of ‘help’ from the central bank on the monetary policy side.”

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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