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Hungary May Need to Raise Interest Rates to Buoy Forint, Danske Says
Investors should be “positioned” for higher interest rates in Hungary after the central bank said yesterday the forint’s record weakness against the Swiss franc poses risks to growth and local banks, Danske Bank A/S said.
“The Hungarian central bank clearly continues to deliver hawkish comments,” the Copenhagen-based bank wrote in a report to clients today. “A rate hike within the next three months can no longer be ruled out.”
Hungary may need assistance from the International Monetary Fund and the European Union after the country’s bailout expires in October, Reuters reported, citing central bank spokesman Andras Simon. The comment came after the forint slid to record low of 223.455 against the franc yesterday. Some banks in Hungary may need additional capital as the weaker forint damages loan portfolios, Reuters said.
About 5.4 trillion forint ($24.1 billion), or two-thirds of Hungary’s overall household credit, is denominated in foreign currencies. Of that, 82 percent is in Swiss francs, according to central bank data. Hungarian banks restructured an increasing number of household and commercial loans in the second quarter, the central bank said on Aug. 12.
Hungary failed to raise the planned amount at an auction of 12-month Treasury bills today as concern interest rates may rise damped investor demand. The average accepted yield rose to 5.82 percent from 5.44 percent at a similar auction on Aug. 19.
Record Low
The Magyar Nemzeti Bank held its main interest rate at a record-low 5.25 percent on Aug. 23 and said faster inflation and worsening debt risks after the collapse of IMF talks may prompt a rate increase. The bank raised its inflation forecast and lowered growth estimates for the next two years.
“The probability of an October rate hike is increasing,” Gyula Toth, Vienna-based emerging-market strategist at UniCredit SpA, wrote in a note to clients today.
The forint has been this year’s worst performer among more than 20 emerging-market currencies tracked by Bloomberg, weakening 5.3 percent versus the euro. Hungary said in August it won’t seek a new loan from the IMF, which gave the country 20 billion euros in aid in 2008 to avert default during the global credit crisis.
Hungarian bonds fell, lifting the yield on the forint note maturing in 2013 by 4 basis points to 6.980 percent at 1:20 p.m. in Budapest. The forint weakened 0.4 percent against the Swiss franc to 219.516, after appreciating 1.8 percent yesterday.
To contact the reporter on this story: Krystof Chamonikolas in Prague at kchamonikola@bloomberg.net
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