Hungary Holds Benchmark Interest Rate for Second Month on Inflation, Risk

Hungary’s central bank left the benchmark interest rate unchanged today for a second month and urged the government to reveal details of its fiscal plan to help improve the country’s risk assessment.

The Magyar Nemzeti Bank in Budapest kept the benchmark two- week deposit rate at 5.25 percent, the lowest since communism ended 20 years ago. The outcome matched the forecast of 15 economists in a Bloomberg survey. One predicted a reduction to 5 percent. The decision was backed by an “overwhelming” majority of policy makers, central bank President Andras Simor said.

Hungary halted 10 months of rate cuts in May after the forint weakened on concern that Prime Minister Viktor Orban’s new government will loosen fiscal policy. The cabinet reversed course and pledged to meet the country’s creditor-approved budget-deficit target. The central bank increased its inflation forecast on May 31 to reflect rising energy prices.

“In light of inflationary risks and the deteriorating risk assessment, the Council has decided to leave rates unchanged and prefers not to give any indications regarding the future,” Simor told reporters today after the decision.

The forint has weakened 1.2 percent against the euro since the last rate meeting on May 31 and traded at 278.15 at 4:46 p.m. today. It dropped as low as 290.52 on June 7 after officials from the ruling party compared Hungary with Greece and said that the previous government lied about public finances.

‘Increased Political Risks’

The government should unveil the details of its economic action plan as Hungary’s risk assessment deteriorated “significantly due to uncertainties surrounding fiscal policy,” the central bank said in a statement.

“Increased political risks help explain why the” central bank “has turned much more hawkish in recent months,” Neil Shearing and David Oxley, economists at Capital Economics Ltd., said in an e-mail. “All told, it is looking increasingly likely that the final 25 basis point rate cut, needed to take rates to our long-held forecast of 5 percent, will not arrive.”

The central bank last month raised its inflation forecast to 4.9 percent from 4.4 percent for this year and to 3 percent from 2.3 percent in 2011. The bank estimates consumer-price growth will slow to its 3 percent target in the first half of 2011, instead of the second half of this year, with a 2.9 percent average rate in 2012.

Investors’ rate-cut expectations were erased after the increased inflation forecast and the forint’s drop following the comments comparing Hungary with Greece.

Rate Outlook

The six-month forward-rate agreement was 0.01 percentage point higher than the current benchmark, rising above it on June 4 for the first time since April 2009. On the day of the last rate decision, the forward rate was 0.23 percentage point lower than the key rate, signaling a bet for a reduction of a quarter- point by November.

“We expect to see market conditions as the key factor behind today’s vote but risks on inflationary expectations are also starting to surface,” Diana Gesheva, a Sofia-based economist at 4Cast Ltd., said in an e-mail after the decision.

Budget Cuts

The comments about Hungary’s public finances fed concerns Europe’s sovereign-debt crisis may be spreading. Germany, France and Spain were among countries that announced budget cuts to shore up investor confidence.

Orban on June 9 said he plans to raise 187 billion forint ($825 million) this year from a special tax on financial institutions to plug budget holes and reduce the shortfall to 3.8 percent of gross domestic product from 4 percent last year. He plans to cut public spending while reducing taxes on personal income and small businesses to boost growth.

The government is freezing 40 billion forint in state spending at all eight ministries and several public agencies, according to the official gazette Magyar Kozlony’s issue for the period through July 18. Orban plans to save 120 billion forint this year by freezing public spending and reducing aggregate state wages by 15 percent.

Investors are now looking for the government to start implementing the plans, Gyorgy Barta, an economist at Intesa Sanpaolo SpA in Budapest, said in a research note. The target was approved by the International Monetary Fund and the European Union, which gave the bulk of a 20 billion-euro bailout ($25 billion) to Hungary in 2008 to help it avert default.

“Domestic risks such as risks related to the economic policy of the new cabinet and also fiscal risks due to weak economic performance still loom and may diminish only gradually as the new government’s program progresses,” Barta said.

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

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