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Hungarian Central Banker Signals Readiness to Counter Turbulence

June 20, 2013

Hungary is prepared to counter financial turbulence if markets deteriorate, central banker Janos Cinkotai said as the forint fell and bond yields soared on the U.S. Federal Reserve’s plan to taper its stimulus program.

“The Monetary Council is ready to act if financial-market conditions were to fundamentally reverse,” Cinkotai said, according to a transcript of an interview published in Napi Gazdasag newspaper today. “The central bank has tools at its disposal to intervene in case of financial-market turbulence.”

Investors are pulling money from emerging markets at the fastest pace in two years as slowing economic growth and the prospect of less global stimulus sink stocks, bonds and currencies from India to Brazil. More than $19 billion left funds investing in developing-nation assets in the three weeks to June 12, the most since 2011, according to EPFR Global.

Hungary’s scope to push through more cuts is narrowing after the Magyar Nemzeti Bank reduced the main interest rate by a quarter point in each of the past 10 months to a record-low 4.5 percent. The forint plunged along with emerging-market currencies and bond yields rose after Fed Chairman Ben S. Bernanke said yesterday that the U.S. central bank will probably taper its $85 billion in monthly bond buying later in 2013 and halt purchases around mid-2014 as long as the world’s largest economy performs in line with Fed projections.

The forint dropped 1.3 percent to 298.38 per euro by 9:50 a.m. in Budapest, the weakest since June 11. The yield on the 10-year government bond soared to 6.58 percent today, the highest in almost three months, compared with 5.96 percent yesterday and a record low 4.93 percent on May 16.

Investors Split

Investors are now split on whether the Hungarian central bank will continue to reduce borrowing costs this month and have priced in at most a quarter-point cut for the rest of the year, according to forward rate agreements.

The one-month forward rate traded 15 basis points below the Budapest interbank offered rate today. The six-month forward rate traded 11 basis below the BUBOR, indicating that investors are scaling back expectations even for a quarter-point cut the rest of 2013. That compared with the 1 1/4 percentage point reduction priced in on May 15 for the next six months.

Inflation near a 39-year low and an economy emerging from a recession last year are “consistent with a lower central bank rate,” central bank policy makers said, according to the minutes of their May 28 meeting. A day later, MNB President Gyorgy Matolcsy said “those may be right who see further room on a rate-cut path.”

Market Signal

Still, the central bank “is considering ways to signal to the market the principles for ending the rate-cut cycle,” state news service MTI reported on May 31, citing Vice President Adam Balog. The bank has an internal study on a “neutral interest rate” which doesn’t necessarily limit an easing or tightening cycle, Balog said.

The central bank may reduce the two-week deposit rate to 3.5 percent in the next three to four months before being forced to raise it to about 5 percent in 2014, Budapest-based Szazadveg, which advises the government on policy, said on June 18 in an e-mailed report before Bernanke’s comments. Szazadveg said the end of the “era of cheap money” would force a partial reversal of the easing.

The next rate-setting meeting is scheduled for June 25, with all 15 economists in a Bloomberg survey predicting a quarter-point cut to 4.25 percent.

To contact the reporter on this story: Zoltan Simon in Budapest at

To contact the editor responsible for this story: Balazs Penz at

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