Hungary Likely to Hold Rate After Forint Surge

Hungary’s central bank will probably keep borrowing costs unchanged for a second month as a surge in the forint and lower credit risk reduce pressure on policy makers even as talks over a bailout remain stalled.

The Magyar Nemzeti Bank will leave the two-week deposit rate at 7 percent, the European Union’s highest benchmark rate, according to all 22 economists surveyed by Bloomberg News. The decision will be announced at 2 p.m. in Budapest.

Hungary should maintain borrowing costs until agreeing on an International Monetary Fund-led loan, which may allow lower rates, policy makers Ferenc Gerhardt and Gyorgy Kocziszky said Feb. 15. The central bank unexpectedly held rates last month as four first-year members of its rate-setting board, including Gerhardt and Kocziszky, outvoted President Andras Simor and his two deputies, who sought a third successive half-point increase.

“Rates are expected to remain unchanged as long as the country’s risk assessment doesn’t deteriorate significantly,” economists at Intesa Sanpaolo SpA’s CIB Bank Zrt. in Budapest, including Sandor Jobbagy, wrote Feb. 24 by e-mail. “Cautious monetary easing may be on the agenda in the latter part of the year.”

The forint has risen 8.5 percent this year against the euro, the most among currencies tracked by Bloomberg, after Prime Minister Viktor Orban pledged Jan. 5 to come to a “quick” agreement with the IMF and the EU on a loan. It fell 16 percent in the second half of last year, the most in the world. The forint rose 0.4 percent to 289.84 per euro at 9:27 a.m. in Budapest.

Bailout Talks

The cost of insuring Hungarian government debt against non- payment using credit-default swaps fell to 517.5 basis points yesterday from a record 735 points on Jan. 5, before Orban’s pledge, according to data provider CMA. A basis point is 0.01 percentage point.

Forward-rate agreements, used to bet on three-month interest costs in one month, fell 7 basis points to 7.405 percent. The Budapest Interbank Offered Rate traded at 7.38 percent at yesterday’s close.

Orban is trying to revive talks for a bailout, which he sought in November after the forint fell to a record low against the euro and the country’s sovereign-credit rating was cut to junk. Talks broke down the following month after the EU and the IMF said draft legislation threatened central bank independence.

‘In the Air’

Hungary can’t start talks on an international loan until the government meets preconditions, including addressing concerns on monetary policy, the judiciary and the data- protection agency. The EU has no deadline or timeline to assess Hungary’s Feb. 17 response on the infringement procedures, a European Commission spokesman told reporters on Feb. 21.

“It’s in the air” that Hungary’s judicial reform may become a European court case, Deputy Prime Minister Tibor Navracsics told M1 state television today, casting doubt over Orban’s pledge to resolve disagreements quickly in order to move on to the negotiation phase.

“Sentiment towards Hungary has generally improved over the past few weeks, but there are still many risks ahead,” Benoit Anne, head of emerging-market strategy at Societe Generale SA, said in an e-mail today. “In particular, we fear that market participants may be overly optimistic about the chances of the authorities securing an IMF program fairly quickly, given the outstanding that need to be addressed.”

Inflation Accelerates

The inflation rate rose to 5.5 percent in January, the highest since April 2010, from 4.1 percent in December. The Monetary Council doesn’t need to react to a one-time jump in the inflation rate, Gerhardt and Kocziszky said.

A “sustained higher inflation path” would justify a rate increase, central bank Vice President Ferenc Karvalits said Feb. 17. Policy makers target an inflation rate of 3 percent.

“We believe further confirmation about securing an IMF deal and additional fiscal austerity measures for 2013 may be needed to improve the inflation outlook and contribute to further narrowing in risk premiums, which may provide arguments for the Monetary Council to initiate a gradual rate-cutting cycle,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in a report today.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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