Hungary May Leave Main Interest Rate at Record-Low 5.25% for Fourth Month

Hungary will probably leave its benchmark interest rate unchanged today for a fourth month as the currency remains vulnerable to a sell-off in case market sentiment sours following the collapse of talks with creditors.

The Magyar Nemzeti Bank will keep the benchmark two-week deposit rate at a record-low 5.25 percent, according to all 12 economists in a Bloomberg survey. The decision will be announced at 2 p.m. in Budapest. The bank will also publish its updated economic forecasts.

Policy makers have refrained from reducing the interest rate as they assess the fallout from the collapse of talks with the International Monetary Fund and the European Union last month. Hungary was the first EU country to obtain a bailout two years ago. Improved global market sentiment strengthened the forint and reduced yields on government debt in the past month.

“The external environment for the forint has turned more friendly recently, but the forint’s vulnerability still hasn’t disappeared,” Intesa Sanpaolo SpA’s Budapest-based analysts including Gyorgy Barta wrote in a note.

The forint rose 3.8 percent against the euro since dropping to the lowest in more than a year on July 17 after the IMF, which helped extend a 20 billion-euro ($26 billion) bailout in 2008, failed to endorse the government’s budget plans. The currency traded at 279.74 per euro at 8:42 a.m. today.

Hungary’s credit-default swap, measuring the cost of ensuring government against from default, rose the most in the world, by 35 percent, since Prime Minister Viktor Orban took office on May 29. The yield on the country’s 12-month Treasury bills fell to 5.44 percent at an auction on Aug. 19, the lowest in two months.

‘Wait-and-See’

The government, working to boost growth after the worst recession in 18 years, may resume talks with creditors after municipal elections on Oct. 3. Hungary is no longer looking to renew its IMF agreement after it expires in October.

“The foreign-exchange market is generally characterized by a wait-and-see period before the Oct. 3 municipal elections and subsequently an extremely strong focus on the EU’s and the IMF’s reaction to the 2011 budget plan and the related reactions of the major rating agencies,” according to Barta at Intesa.

Orban, elected on a pro-growth platform in April, is resisting pressure from the IMF and the EU to reduce the budget deficit below 3 percent of gross domestic product in 2011 from a targeted 3.8 percent this year, citing the need for fiscal room to boost growth and create jobs at home.

Quarterly economic growth halted in the second quarter, according to a preliminary estimate published by the Budapest- based statistics office on Aug. 13.

Debt Rating Outlook

Hungary’s financing room may narrow after the collapse of talks with creditors, policy makers said in the minutes of last month’s rate meeting. After the suspension of creditor talks, Standard & Poor’s and Moody’s said they may downgrade the country’s debt. Most asset managers prefer other emerging-market assets over Hungarian bonds, according to Luis Costa, an emerging markets strategist at Citigroup Inc. in London.

‘Uncomfortable’

“We are uncomfortable recommending Hungary because of uncertainties with regards fiscal policy next year and thereafter,” Costa said in a note to clients. “This hesitancy contrasts with our positive recommendations on local bonds and bills in Poland, South Africa, Egypt and Ukraine.”

Hungarian rate-setters said they don’t want to rush into a rate increase unless the country’s risk profile suffers “sustained” damage. This would trigger a weakening of the forint and result in overshooting the bank’s 3 percent inflation target in the medium-term, policy makers said in the minutes.

“The decisive majority of Council members adopted a wait- and-see approach because more time is needed to evaluate the market’s reception of the postponement of the credit review,” according to the minutes. “Members agreed that if a sustained rise in risk premium warrants tightening monetary conditions, then there may be a need to raise the benchmark interest rate.”

The annual inflation rate dropped to the lowest in more than a year in July as a value- added tax increase of a year ago no longer affected the index and fuel-price increases slowed. The rate was 4 percent in July. The central bank in May forecast the inflation rate to average 4.9 percent this year and 3 percent in 2011.

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

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