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Hungary Leaves Main Interest Rate Unchanged for Fourth Consecutive Month
Hungary left its benchmark interest rate unchanged for a fourth month and said inflation and debt risks worsening following the collapse of talks with the International Monetary Fund may prompt a rate increase.
The Magyar Nemzeti Bank today held the two-week deposit rate at a record-low 5.25 percent, matching the forecast of all 14 economists in a Bloomberg survey. Policy makers considered raising the key rate by a quarter-point and cutting it by the same amount, central bank President Andras Simor told reporters. The bank raised its inflation forecast and lowered its growth estimates for the next two years.
The rate-setting Monetary Council refrained from reducing rates as it assesses the fallout from the collapse of talks with the IMF 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, without producing a “significant” decline in the country’s risk premium, Simor said.
“Talk of a rate hike will surprise many,” Timothy Ash, head of emerging market research at Royal Bank of Scotland Group Plc in London said in an e-mail. This may be “meant to encourage the government to buckle down and cut a deal to bring the IMF program back on track.”
Forint Drops
The forint has gained 2.8 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 fell 1.3 percent to 282.48 per euro at 3:35 p.m.
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.
Orban, elected on a pro-growth platform in April, has resisted pressure from the IMF and the EU to commit to a budget deficit of less than 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.
‘More Cautious’
The budget deficit may widen to 4.3 percent this year, compared with the government target of 3.8 percent, Simor said. The shortfall may be 4.1 percent in 2011 and 3.7 percent in 2012, he said.
Simor said he had no information about whether government plans to resume negotiations with the IMF over a possible extension of its bailout, which expires in October. Fiscal commitment is “key” to strengthening investor confidence, he said.
“The suspension of talks between the IMF and the Hungarian government and uncertainties surrounding the future refinancing of Hungarian debt may make investors and Monetary Council members cautious for several months to come,” Roland Kovacs, a Budapest-based analyst at Equilor Investment Ltd, said in a note to clients after the rate decision.
Quarterly economic growth halted in the second quarter, according to a preliminary estimate published by the Budapest- based statistics office on Aug. 13. GDP fell 6.3 percent last year, the most in 18 years.
Growth, Inflation
The central bank lowered its economic-growth projection for next year to 2.8 percent from a 3.2 percent estimate in June. In 2012, the economy is will expand 3.8 percent rather than 3.9 percent, it said. The bank left this year’s GDP growth forecast unchanged at 0.9 percent.
Annual average inflation will be 4.7 percent in 2010, compared with a 4.9 percent forecast in June, the bank said. For 2011 and 2012, the bank raised its inflation forecasts by 0.5 percentage points to 3.5 percent and 3.4 percent, respectively, its updated Inflation Report showed.
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.
“If inflation risks are sustained or the country’s risk premium worsens sustainably, a rate increase may become warranted,” Simor said.
Most asset managers prefer other emerging-market assets over Hungarian bonds, according to Luis Costa, an emerging markets strategist at Citigroup Inc. in London.
“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.”
To contact the reporter on this story: Zoltan Simon in Budapest at zsimon@bloomberg.net
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