Hungary’s central bank won’t return to cutting interest rates “any time soon” because of the nation’s increasing risk premium and inflation outlook, said analysts at 4Cast Ltd., Erste Group Bank AG, Concorde Securities and Citigroup Inc.
The Magyar Nemzeti Bank yesterday refrained from lowering rates for the first time in 11 months, defying the new government’s calls for monetary easing. Policy makers kept the benchmark two-week deposit rate at a record-low 5.25 percent. Future cuts hinge on “the outlook for inflation as well as perceptions of risk,” the rate-setting Monetary Council said.
The forint fell 4.7 percent against the euro since the April rate cut as the euro region’s debt crisis roiled emerging- market assets. Rate setters also considered the worsening inflation outlook and concern that the new Cabinet may allow the budget gap to widen, central bank President Andras Simor said.
“Considering recent risk aversion and rising risk premium on the Hungarian economy, we do not see further rate cuts any time soon and the base rate will probably remain at 5.25 percent until year-end,” said Diana Gesheva, an economist at 4Cast in Sofia, in a note to clients.
The forint traded at 275.46 at 8:17 a.m. in Budapest from 274.80 late yesterday. Credit-default swaps, a measure of the cost to insure government bonds, rose to the highest in more than nine months in May. The five-year swap was at 241.825 basis points on May 28, 57 basis points higher than before the April rate cut.
The spread between the six-month forward rate agreement and the current benchmark rate shrank to 0.23 percentage point yesterday from 0.27 percentage point on May 28, indicating that investors scaled back rate-cut expectations.
The central bank raised its inflation forecast to 4.9 percent from 4.4 percent for this year and to 3 percent from 2.3 percent for 2011. The bank now estimates inflation will slow to its 3 percent target in the first half of 2011, instead of the second half of this year. The economy may grow 0.9 percent this year, 3.2 percent in 2011 and 3.9 percent in 2012, it said.
The decision to keep the benchmark rate unchanged yesterday may exacerbate tensions between the central bank and Prime Minister Viktor Orban, who assumed power on May 29. Cabinet members called on the bank’s leadership to resign for “policy mistakes,” including for being slow in cutting rates.
Economy and Finance Minister Gyorgy Matolcsy last week said the bank has room to cut the benchmark rate to 4.5 percent.
The room to ease monetary policy after central bankers lowered the benchmark rate from 11.5 percent in October 2008 may also be limited by the budget policies of the new government, said Zoltan Arokszallasi, analyst at Erste Bank in Budapest. The Cabinet will stress job creation and economic growth over budget discipline as the country recovers from its worst recession in 18 years, Matolcsy has said.
“The economic policy of the new government is now becoming an increasingly important factor in future base rate decisions,” Arokszallasi said in a note to clients. The bank will remain on hold at the “next few meetings.”
An improvement in the assessment of the new government’s economic policy, leading to lower risks associated with Hungary, may allow the central bank to cut rates, said Janos Samu, an analyst at Concorde Securities said in a note to clients. Samu expects one more rate cut to 5 percent by the end of 2010.
“We doubt this could happen soon,” he wrote in an e-mail.
The budget shortfall this year may be as wide as 7.5 percent of gross domestic product, nearly twice the current target, Mihaly Varga, Orban’s chief of staff, said in an M1 television interview yesterday.
The IMF, which has said the 3.8 percent target is “achievable” with additional measures, “needs to change its position” and recognize the wider gap, Varga said.
The central bank “is likely to keep its wait-and-see stance and only deliver one more 25 basis-point rate cut if the external environment turns more supportive and the fiscal outlook clears,” Eszter Gargyan, an economist at Citigroup in Budapest, wrote in a note to clients.