Hungary to Avoid Rate Cut on Inflation, Bailout Concern

Hungary’s central bank will probably refrain from cutting the European Union’s highest benchmark interest rate because of accelerating inflation and possible delays in obtaining a bailout.

The Magyar Nemzeti Bank will leave the two-week deposit rate at 7 percent for an eighth month, according to 17 of 18 economists in a Bloomberg survey. One expects a cut to 6.75 percent. The central bank will announce the decision at 2 p.m. in Budapest.

Policy makers last month voted five to two to keep rates unchanged, rejecting arguments that easing policy would prop up the economy that entered its second recession in four years, minutes of the July 24 meeting show. The majority argued that the central bank should wait for the outcome of bailout talks with the International Monetary Fund and the European Union before lowering borrowing costs.

“We think the National Bank of Hungary will resist pressures and keep its 7 percent base rate on hold, however, this is a close call,” Daniel Hewitt, an economist at Barclays Plc (BARC) in London, said in an e-mailed note.

Forward-rate agreements used to wager on interest rates in one month fell 7 basis points to 6.87 percent yesterday, the lowest since November. The FRAs traded 28 basis points below the Budapest Interbank Offered Rate, the biggest spread in more than two years and signaling expectations for a quarter-point rate cut. A basis point is 0.01 percentage point.

ECB Rates

The European Central Bank this month kept its main interest rate unchanged at a record-low 0.75 percent and the deposit rate at zero. Czech policy makers left their two-week repurchase at a record-low 0.5 percent on Aug. 2, while their Polish colleagues, who surprised the market with a quarter-point increase in May, also kept the benchmark rate at 4.75 percent on July 4.

A rate cut may add momentum to the economy and would be accepted by investors, Ferenc Gerhardt, a monetary-policy maker said in an Aug. 10 interview. Meanwhile, Simor, speaking after last month’s rate decision, argued for a “cautious policy stance” until the outcome of bailout talks is known.

Hungary is set to resume talks with the international lenders on a credit line of about 15 billion euros ($18.8 billion) to protect the economy from euro-area contagion and to lower financing costs. IMF and EU officials are focusing on untangling policies that contributed to an economic contraction in the first two quarters and the downgrade of Hungary’s credit to junk.

‘Weak GDP’

“Weak second-quarter GDP data further boost the chance of monetary easing, however, we only expect this at the end of September due to accelerating inflation and pending IMF-EU negotiations,” Istvan Horvath, director at the Budapest investment management unit of KBC Groep NV (KBC), said in a statement yesterday. Hungary may lower borrowing costs in several steps until the end of the year, Horvath wrote.

The economy contracted 0.2 percent in the second quarter from the previous three months and shrank 1.2 percent from the year-earlier period.

Inflation, the fastest in the EU, accelerated to 5.8 percent in July from 5.6 percent in June, drifting further from the central bank’s 3 percent target. The pace of consumer-price increases may slow to the goal in 2014, Simor said last month.

Forint, CDS

The forint, which gained 13 percent against the euro this year as investors speculated that Hungary will obtain an IMF bailout, has advanced 1.2 percent this month, the third-best performance among more than 20 emerging-market currencies tracked by Bloomberg. The currency weakened 0.3 percent to trade at 278.47 per euro at 11:38 a.m. in Budapest.

The cost of insuring against default on Hungary’s debt for five years using credit-default swaps fell to 427 basis points from this year’s highest close of 735 basis points on Jan. 5.

“While we still see 50 basis points in rate cuts this year, we perceive some risks to the path priced in by the market,” analysts at OTP Bank Nyrt. wrote in a research report last week. Policy makers will “take a wait-and-see” stance until the next Report on Inflation is published in September, according to the note.

Recent comments by Gerhardt and fellow council member Gyorgy Kocziszky showed a rift between Simor and his two deputies on one side and at least three of the four non- executive rate-setters, who were appointed last year with ruling-party backing, on the other. The four united against the bank’s leadership in January when they outvoted a proposal to raise the benchmark rate by a half-point to 7.5 percent to keep borrowing costs unchanged.

Council Rift

Gerhardt and Kocziszky, along with fellow non-executive rate-setter Andrea Bartfai-Mager, voted with Simor and his deputies to maintain interest rates against Janos Cinkotai, the fourth non-executive member, who backed rate cuts, since February. Last month, Kocziszky joined ranks with Cinkotai in backing a 25 basis-point reduction.

Simor and the two deputy governors will probably vote to hold rates, and three of the non-executive council members are likely to back a 25 basis-point cut, David Nemeth, economist at ING Groep NV in Budapest said in an e-mailed before the rate decision.

“The only question is, what will Ms. Bartfai-Mager prefer?” he wrote.

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

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

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