Hungary Cuts Rates for Growth Amid EU’s Highest Inflation

Hungary cut its main interest rate for a third month and may consider further easing as concern about a recession outweighs the European Union’s fastest inflation and fading chances of obtaining international aid.

The Magyar Nemzeti Bank reduced the two-week deposit rate by a quarter-point to 6.25 percent, still the EU’s highest, matching the forecast of 16 of 18 economists in a Bloomberg survey. Policy makers had a “narrow majority” for the cut over a proposal for no change, MNB President Andras Simor said.

The bank pressed ahead with the third quarter-point cut since August as policy makers focused on a deepening recession rather than on price growth. The moves have polarized the Monetary Council, with the four non-executive members outvoting Simor and his two deputies on the past two occasions.

“With the latest activity data suggesting that the economy remains mired in recession, we think the four external MPC members once again voted to cut rates today,” William Jackson, a London-based economist at Capital Economics Ltd., said in an e-mail. “Financial vulnerabilities and a lack of progress toward an IMF deal mean that there is limited room for further easing.”

The forint, the world’s best-performing currency this year as investors bet on an IMF deal, strengthened 0.3 percent to 284.28 per euro by 4:05 p.m. in Budapest today. It has weakened 1.6 percent against the euro since the 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.

More Cuts

The yield on the benchmark 10-year government bond has risen 33 basis points in the past week to 6.97 percent today. It fell 11 basis points from yesterday, when the yield reached the highest since Oct. 10. The cost of insuring Hungary’s bonds from default rose to 273.34 basis points, a one-week high, yet still significantly lower than the 386.35 basis points a month ago.

“The council will consider a further reduction in interest rates if data in the coming months confirm that the improvement in financial-market sentiment persists and the medium-term outlook for inflation remains consistent with the 3 percent target,” the Monetary Council said in its statement.

The improvement in risk assessment over the past month “probably carried the day” in today’s rate decision, trumping concerns for the inflation outlook, Akos Kuti, a Budapest-based analyst at Equilor Befektetesi Zrt., said by e-mail. The forint may “test” the 286 to 288 per euro level, he said.

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 improvement in Hungary’s risk assessment was mainly caused by the ECB flooding markets with liquidity and other international developments, Simor told reporters today, adding that the Monetary Council was divided on the risk outlook.

Hungary reaching an agreement with the IMF and the European Union is “crucial” for a “sustained” improvement in country risk levels and for a reduction in government bond yields, the Monetary Council said.

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.

Weak domestic demand will “dominate” the medium-term inflation outlook, with cost shocks having “no adverse effect” in the mid-term, the Monetary Council said in its statement.

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 predicts an expansion of 0.9 percent in 2013, compared with a previous estimate of 1.6 percent, according to the updated outlook.

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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