Hungary Eyes Rate Cut as Slump Trumps Inflation Concerns

Hungary’s central bank will probably cut its main interest rate for a second month amid a deepening slump, shunning concern about the European Union’s fastest inflation and stirring divisions among policy makers.

The Magyar Nemzeti Bank will reduce the two-week deposit rate to 6.5 percent from 6.75 percent, the EU’s highest, the second quarter-point cut in as many months, according to 17 of 29 economists in a Bloomberg survey. Twelve forecast no change. The decision will be announced at 2 p.m. in Budapest.

Policy makers last month lowered the main rate for the first time since April 2010 as the four non-executive members of the Monetary Policy Council, appointed by Prime Minister Viktor Orban’s allies in parliament, outvoted central bank President Andras Simor and his two deputies. With the economy mired in its second slump since 2009, Hungary is in talks to obtain a loan from the International Monetary Fund.

“The four government-appointed” policy makers are “likely to vote for another rate cut and as they hold the majority of seats they are likely to dominate over the 3 other MPC members,” Carolin Hecht, a Frankfurt-based strategist at Commerzbank AG, wrote in an e-mail today.

Underscoring divisions on the council, Simor on Sept. 13 called the cut “pointless” with inflation at double the bank’s 3 percent target. The move cast doubt on the bank’s commitment to tackle price growth and did little to boost an economy held back by subdued lending and investments, he said.

Best Performer

The forint has been the world’s best-performing currency this year as investors bet the government will obtain an IMF backstop. The currency rose 11.2 percent against the euro even after dropping 2 percent from its level before the Aug. 28 rate cut. The forint traded at 283.3 per euro at 9:24 a.m. today. It plunged 15 percent, the most in the world, in the second half of last year.

Hungary’s cost to insure debt for five years with credit default swaps fell to 385 basis points today from 423 basis points before the August rate cut and compared with 630 basis points on June 5. The yield on the government bond maturing in 2022 dropped 17 basis points to 7.29 percent in the period.

“We still believe the external members are operating a framework of cutting when they can,” Peter Attard Montalto, an economist at Nomura Plc in London, said in an e-mail yesterday. With the current forint and CDS levels, “we think they will indeed cut again.”

Regional Peers

As demand for exports wanes in the 17-nation euro region amid the sovereign-debt crisis, the Czech central bank on Sept. 27 may cut its main rate to 0.25 percent from 0.5 percent, already a record low. The Romanian central bank may keep its main rate unchanged at 5.25 percent the same day, the median estimate of economists in Bloomberg surveys show.

Hungary’s potential rate cut may clash with the central bank’s new forecasts in its quarterly inflation report, to be published at 3 p.m. in Budapest, which will probably boost estimates for price growth. The inflation rate may fall to the target in 2014 instead of 2013 as estimated in the bank’s June report, Simor said July 24. The August rate rose to 6 percent, the highest since Jan. 2010, led by food and fuel prices.

Inflation Forecast

“We think there is a very good chance that the inflation forecast will be revised higher, potentially in a meaningful way,” Pasquale Diana, a London-based economist at Morgan Stanley, said in a Sept. 21 research note. “Growth is likely to be revised down from the previous estimates.”

Simor will explain the rate decision at 3 p.m., while the Monetary Policy Council will publish a statement on how the latest inflation and economic forecasts may impact rate policy.

Hungary’s economy shrank 1.3 percent in the second quarter from a year earlier, after contracting 0.7 percent in the three months through March. Industrial production fell 2.2 percent in July from a year earlier as the economy plunged into a deeper recession than previously forecast.

The Cabinet’s measures over the past two years, including a special tax on lenders and nationalization of private-pension funds, damaged investor confidence, contributed to a lowering of the country’s credit rating and a cut in investments.

IMF Talks

Hungary requested aid in November as its debt was downgraded to junk. Negotiations for a loan of about 15 billion euros ($19.4 billion) were delayed multiple times because of Orban’s resistance to adhere to legal and economic conditions set by the IMF and the EU.

Hungary is expecting to conclude negotiations by November, chief aid negotiator Mihaly Varga said in an interview published in Magyar Nemzet newspaper on Sept. 22.

Orban rejected IMF aid after coming to power in 2010 only to ask for help after debt auctions failed and the forint plunged to a record. Financing pressures have eased since the European Central Bank on Sept. 6 pledged to buy the bonds of troubled euro nations to help resolve the region’s debt crisis.

The improvement may be short-lived, said Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo SpA.

“While in the short-run we don’t expect a negative correction in global markets, sentiment may deteriorate, which would obviously impact forint assets, especially without an IMF backstop,” Trippon wrote in a Sept. 21 note. On rates, “a wait-and-see approach would be a realistic decision.”

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