Hungary Set for Third Rate Cut as Growth Trumps Inflation

Hungary will probably cut its main interest rate for a third month as concern about economic growth outweighs the European Union’s fastest inflation and fading chances of obtaining an international aid deal.

The Magyar Nemzeti Bank will reduce the two-week deposit rate by quarter-point to 6.25 percent, still the EU’s highest, according to 16 of 18 economists in a Bloomberg survey. Two forecast no change. A decision will be announced at 2 p.m. in Budapest followed by a news conference an hour later.

The central bank cut its benchmark by a quarter-point on Sept. 25 as policy makers focused on a deepening recession rather than on price growth. The decision split the Monetary Council as the four non-executive members outvoted central bank President Andras Simor and his two deputies for a second month.

“It seems the easing cycle will continue until the market tells the MPC to stop,” Dan Bucsa, a London-based economist at UniCredit SpA (UCG), said in an e-mail yesterday. “The current monetary-policy easing cycle looks unsustainable without an IMF agreement.”

The forint, the world’s best-performing currency this year as investors bet on an IMF deal, weakened 1.9 percent against the euro since Origo news website reported on Oct. 26 that the IMF doesn’t plan to restart talks. The IMF the same day confirmed Hungary has no date to continue talks, which Premier Viktor Orban requested in November.

‘Depressed Economy’

The yield on the 10-year government bond in the past two trading sessions rose 47 basis points to reach 7.16 percent by 8:41 a.m. in Budapest, the highest since Oct. 10. The cost of insuring Hungary’s bonds from default traded at 270 basis points, a one-week high.

“The majority of the MPC is still likely to vote for another cut to try and boost the depressed economy,” Gaelle Blanchard, a London-based emerging-market strategist at Societe Generale SA, said in an e-mailed research note today. “The recent pressure on the forint and local rates is unlikely to be enough to prevent a cut.”

Stimulus Benefits

Hungary has benefited from the stimulus of central banks such as the U.S. Federal Reserve and the European Central Bank, easing debt financing pressure as investors hunt for higher- yielding assets. The government is sticking to its conditions for accepting any aid and “life goes on” if no deal is signed, negotiator Mihaly Varga said yesterday.

The central bank is cutting rates even as the inflation rate rose to 6.6 percent in September, the highest since July 2008, from 6 percent in August. Policy makers target 3 percent inflation. MNB staff last month forecast that with a main interest rate of 6.75 percent, the inflation goal would only be reached in the second half of 2014.

The four non-executive members of the rate body considered that rates may be cut further if financial-market conditions are “favorable” for a “sustained” period and if medium-term inflation risks remain “moderate,” according to the minutes of last month’s meeting published Oct. 10.

Policy makers were divided on the inflation outlook and potential impact of a rate cut on output, according to the minutes.

Forecasts Cut

The government this month cut its forecast for gross domestic product to a contraction of 1.2 percent this year from 0.1 percent growth. The Cabinet expects an expansion of 0.9 percent in 2013, compared with a previous estimate of 1.6 percent, according to the updated outlook.

The effect of rate cuts on growth is limited as the monetary transmission channel is “impaired,” Pasquale Diana and Jaroslaw Strzalkowski, London-based economists at Morgan Stanley, said in an Oct. 26 research note, who nonetheless forecast a rate cut to 5 percent by “next summer.”

“We think that as long as the risk backdrop is reasonably supportive, the same narrow majority will continue to argue for monetary easing to support growth,” Diana and Strzalkowski said. “After all, as we often stress, the fact that monetary policy is not working effectively at present can also be used as a reason to do more, not less.”

To contact the reporter 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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