Hungary to Leave Main Interest Rate Unchanged on Fiscal-Policy Reversal

Hungary will probably leave its benchmark interest rate unchanged today for a fifth month as the government’s commitment to fiscal rigor helped curbed risk costs, reducing the likelihood of a rate hike.

The Magyar Nemzeti Bank will keep the benchmark two-week deposit rate at a record-low 5.25 percent, according to all 17 economists in a Bloomberg survey. The decision will be announced at 2 p.m. in Budapest.

Prime Minister Viktor Orban’s government this month pledged to reduce the 2011 budget deficit to below the European Union’s limit of less than 3 percent of output, two months after falling out with international lenders over the same target. The forint strengthened and government bond yields dropped, which may change the mind of proponents of higher rates, economists said.

The forint’s gain “cooled down rate-hike expectations in the market,” Gyula Toth, an emerging-market strategist at UniCredit SpA, said by phone from Vienna. “The government’s deficit announcement has changed the interest-rate outlook in that it essentially ruled out a rate hike in the short term.”

The forint has gained 3.3 percent against the euro this month, the most among 25 emerging-market currencies tracked by Bloomberg. The yield on Hungary’s five-year bonds declined 80 basis points to 6.8 percent after reaching a 2010 high on July 23. A basis point is 0.01 percentage point.

Rate-Increase Talk

The currency dropped 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.

Monetary policy makers raised the possibility of increasing the benchmark interest rate in August after the breakdown of talks. Supporters of higher borrowing costs, including central bank President Andras Simor, argued that the move would strengthen the forint, spur domestic demand and economic growth and said “it’s not worth delaying a tightening,” according to the meeting’s minutes.

The government, working to boost growth after the worst recession in 18 years, bowed to EU pressure to commit to its predecessor’s budget deficit target of 2.8 percent for 2011. Details of the 2011 budget will be presented in mid-October, following local elections set for Oct. 3.

“If the budget details show credible measures, Hungary may get away without hiking interest rates,” Toth said. Inflation would allow for lower borrowing costs, he said.

Inflation Slows

The August inflation rate dropped to the lowest since June 2009, led by declines in the prices of clothing and consumer goods. The central bank in August forecast the inflation rate to average 4.7 percent this year and 3.5 percent in 2011.

Hungary’s economic recovery halted in the second quarter as rising exports failed to compensate for austerity measures, stifling domestic demand. Annual growth in the period accelerated to 1 percent from 0.1 percent, the Budapest-based statistics office said on Sept. 8.

The government’s commitment to cut the deficit hasn’t removed the threat to its credit rating and Hungary needs to clarify its economic policies for that, Standard & Poor’s and Moody’s Investors Service said Sept. 15.

To contact the reporter responsible for this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James Gomez at jagomez@bloomberg.net

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