Hungarian Bond Yields Cap Biggest Three-Day Rise in Seven Weeks

Hungary’s government bonds extended the biggest three-day slump in seven weeks after Hungary’s central bank kept its benchmark interest rate at 7 percent, the highest in the European Union.

The yield on benchmark five-year bonds rose 12 basis points to 7.45 percent, compared with a 10-month low of 7.146 percent on July 19. The bond slumped 1.3 percent in the past three days. The forint depreciated 0.3 percent to 289.03 per euro by 4:47 p.m. in Budapest after the European Central Bank said Hungary’s financial transaction tax infringes its central bank’s independence.

The Magyar Nemzeti Bank kept the two-week deposit rate at 7 percent today for a seventh month, matching the forecast of 20 economists in a Bloomberg survey. One expected a cut to 6.75 percent. The monetary council is divided on whether Hungary’s start of talks on an International Monetary Fund bailout last week has boosted investor confidence in the country enough to allow easing.

“The timing of the inevitable decision to cut rates in the coming months will depend on the development of Hungary’s negotiations on the IMF/EU bailout,” Aurelija Augulyte, a Copenhagen-based analyst at Nordea Bank AB (NDA), wrote in an e-mail after the central bank decision.

The start of aid talks creates room to cut the main rate as early as this month to help growth as the economy sinks into its second recession in four years, central bankers Ferenc Gerhardt and Gyorgy Kocziszky said on July 11. Vice President Julia Kiraly warned the next day that lowering the rate “prematurely” may erode the bank’s credibility.

‘Cautious’

The council backed unchanged rates with a “substantial majority,” central bank President Andras Simor told reporters today, adding that Hungary needs a “cautious” rate policy because of the volatile risk environment.

“Comments after today’s decision to keep the 7 percent policy rate unchanged are slightly more hawkish than what could have been anticipated prior to the release,” Zoltan Arokszallasi, an analyst at Erste Group Bank AG, wrote in a research report.

Hungary’s financial transaction tax, which the government extended to the central bank, “impairs” the Magyar Nemzeti Bank’s independence, the ECB said in a legal opinion published on its website today.

The government raised a planned 45 billion forint ($188 million) at an auction of three-month Treasury bills today before the central bank decision. The average yield was 6.86 percent, the lowest since Nov. 28, according to results from the Debt Management Agency on Bloomberg. Investors bid for 80 billion forint, compared with 177 billion forint a week ago.

Emerging-market stocks dropped for a third day on concern Europe’s debt crisis is worsening, overshadowing an improving outlook for China’s manufacturing.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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