Aug. 24 (Bloomberg) -- Hungary’s central bank will probably cut the benchmark interest rate to the lowest in 17 months today to help jolt the nation out of its worst recession in 18 years.

The Magyar Nemzeti Bank in Budapest will lower the two-week deposit rate, the joint highest in the European Union with Romania, to 8 percent from 8.5 percent, according to all 17 analysts in a Bloomberg survey. The decision will be announced at 2 p.m.

The bank in July reduced the benchmark by a percentage point, the first cut in six months, on rising investor confidence in the first European Union nation to get a bailout. Rates may fall further after reports showed the economy shrank more and consumer prices rose less than analysts forecast.

“The international environment continues to be supportive” of a rate cut, said Daniel Bebesy, a fund manager at Budapest Investment Management. “The growth figure was a bit worse than expected and July inflation showed that retailers can barely pass on the tax increase because of the weak demand.”

Twenty-four of the 54 central banks tracked by Bloomberg eased monetary conditions in the past three months to fight the recession, including eastern European countries such as the Czech Republic, Russia, Ukraine and Romania this month.

Hungarian monetary policy makers resumed rate cuts after a six-month pause as the forint firmed from a record low against the euro in March. The currency has gained 15 percent since then, making it the fourth-best performer since February of 26 emerging-market currencies tracked by Bloomberg, as of today.

Credit-Default Swaps

Hungarian credit-default swaps linked to five-year bonds, the cost of protection against a default, fell to 224 basis points on Aug. 6, a 10-month low, from a record 638 basis points on March 9, Bloomberg data show. They were at 242 basis points on Aug. 21. A basis point is 0.01 percentage point.

Policy makers last month agreed that the benchmark rate may decline “substantially” by the end of the year unless international and domestic economic indicators show significant worsening, according to the minutes of the July rate-setting Monetary Council meeting, published on Aug. 12.

Forward-rate agreements show that investors are stepping up expectations of lower rates over the next six months. They foresee the rate falling almost 1.5 percentage points in that period, the biggest such spread since January.

‘Increasing Chance’

“I see an increasing chance of even a 75 basis-point reduction and I’m just about certain on the 50 basis-point cut,” said Gabor Orban, head of fixed income at Aegon Fund Management in Budapest, who manages about 3 billion euros ($4.3 billion) of assets. “The inflationary environment will allow this and the central bank can live with even some forint weakening.”

Policy makers forecast an economic contraction of an estimated 6.7 percent this year will keep the inflation rate to the bank’s 3 percent target in the medium term, signaling it expects a rise in headline inflation from July to be temporary.

The rate rose to 5.1 percent in July, the highest since October 2008, from 3.7 percent in June, as an increase in the value-added tax rate took effect. Economists estimated the rate at 6.1 percent, according to a Bloomberg survey.

Declining Pressure

“It’s been clear for some time now that inflation pressures in Hungary are very much declining,” said Manik Narain, a currency strategist at Standard Chartered Bank in London. “The point is that the central bank is being very conservative and is watching the forint level very closely.”

The government raised the main VAT rate to 25 percent from 20 percent on July 1 to keep the budget deficit in check and meet terms of a 20 billion-euro International Monetary Fund-led bailout at a time when the recession is cutting budget revenue.

Policy makers had halted an easing cycle in February of this year on concern the weakening currency may trigger defaults on foreign-currency loans, undermining financial stability. With the July rate cut, the bank has completely rolled back the emergency increase.

To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net

Last Updated: August 24, 2009 02:38 EDT