Hungary External Rate Setters Outvote President in Rate Cut

Hungary’s non-executive policy makers outvoted the central bank’s president and his two deputies in August to cut the main interest rate for the first time in almost 2 1/2 years as the economy slid into recession.

Central bankers voted 4-3 to lower the cost of borrowing by a quarter of a percentage point to 6.75 percent on Aug. 28 with Magyar Nemzeti Bank President Andras Simor and the two deputy governors supporting unchanged rates, minutes of the Budapest meeting showed today.

Hungary’s deepening recession prompted policy makers to unexpectedly cut the European Union’s highest rate last month amid divisions in the Monetary Council on when to start easing. The economy shrank 0.2 percent in the second quarter from the previous three months and 1.2 percent from a year ago.

Further cuts may follow if “supply shocks to the economy and the upward impact on prices of government measures don’t lead to the buildup of second-round inflationary effects and perceptions about the Hungarian economy continue to improve,” according to the minutes, which were published on the bank’s website today.

Weaker Forint

The forint weakened 0.4 percent to 283.11 per euro by 2:31 p.m. in Budapest. The currency has advanced 11.3 percent against the single currency this year, the best performance among more than 20 emerging market currencies tracked by Bloomberg, as investors bet the country would obtain an international bailout.

Policy makers disagreed on how much monetary easing would help boost economic growth, according to the minutes.

“The majority view of the Council was that it was time to act in the interests of growth,” while others argued that “premature” monetary easing would not have a material impact on the economy, the minutes showed.

‘Technical’ Recession

The report on gross domestic product showed the economy is “technically” in recession and the slowdown in external demand hurts the growth outlook, the Monetary Council said after the Aug. 28 meeting.

Inflation, the fastest in the EU, accelerated to 6 percent in August, the fastest in more than 2 1/2 years. The gauge is expected to remain “significantly” above the central bank’s 3 percent target in 2013, according to the minutes.

Hungary is seeking to resume talks with the International Monetary Fund and the European Union on a credit line of about 15 billion euros ($19.3 billion) to protect the economy from euro-area contagion and to lower financing costs.

The government may complete a deal by the end of this year, chief aid negotiator Mihaly Varga said in an interview in Warsaw yesterday. Negotiations may resume after the IMF’s October annual meeting, rather than this month, Varga said.

An IMF deal would be “beneficial” for the country, however the government only wants a “good” agreement, Prime Minister Viktor Orban said yesterday.

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

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

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