Hungary’s central bank, roiled by divisions among policy makers, cut the European Union’s highest benchmark rate for a fifth month as policy makers shrugged off the forint’s plunge to a five-month low.
The Magyar Nemzeti Bank lowered the two-week deposit rate to 5.75 percent from 6 percent, the fifth quarter-point cut in as many months, matching the forecast of all 19 economists in a Bloomberg survey. Policy makers voted for the cut with a “tight majority” over a proposal for no change, central bank President Andras Simor said.
Simor, who on Dec. 7 urged the bank to act “much more firmly” against inflation, which slowed to an 11-month low of 5.2 percent in November, has been outvoted along with his two deputies in the past four rate meetings by non-executive members who want to spur an economy battling its second recession in four years. The forint weakened yesterday amid speculation the bank may take further policy steps.
The central bank lowered its inflation forecast for 2013 to an average 3.5 percent, from a projection of 5.8 percent in September, as a result of the government cutting household energy prices by 10 percent from January and delaying a rise in excise taxes. The bank sees the economy expanding 0.5 percent next year, versus an earlier forecast of 0.7 percent, after an expected 1.4 percent contraction in 2012, according to the bank’s updated Inflation Report published today.
Core inflation, which strips out volatile energy prices, is seen at 3.5 percent in 2013 and 3.4 percent in 2014, Simor said, adding that “in my opinion these figures don’t reflect an improvement in the inflation outlook.”
The updated inflation forecast for 2013 is “an additional argument to continue rate cuts,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank, said in an e-mail today. “In case we don’t see a more tangible forint weakening, the rate-cut cycle is expected to continue and we forecast the key rate at 5 percent by end-June.”
The forint dropped 1.6 percent in the past two days and traded at 288.45 per euro by 4:02 p.m. in Budapest, with traders and strategists citing reports of government plans to apply greater pressure for monetary easing among the reasons for the drop. The weakening pared the forint’s gain this year to 9.2 percent, the second-biggest rise after the Polish zloty.
The central bank should ignore temporary forint volatility, Simor said, adding that the currency’s recent weakening “may have showed a fragile investor confidence in Hungary.”
The four non-executive policy makers, appointed by Prime Minister Viktor Orban’s ruling party in 2011, have pointed to the resilience of the currency and falling risk premium for supporting monetary easing. They have also argued that the inflation rate may drop to the bank’s target in 2014 as cost shocks from energy and food prices fade.
“Yesterday’s sell-off in the forint to a five-month low suggests that the markets may not tolerate many further rate cuts,” William Jackson, an economist at Capital Economics Ltd. in London, said in an e-mailed report today. With the euro-area crisis set to escalate next year, the central bank may be forced to increase rates to defend the forint, he said.
Hungary on Dec. 13 sold 2028 bonds at an average yield of 6.31 percent, the lowest in seven years. Credit-default swaps, measuring the cost of insuring Hungarian debt against non- payment for five years, traded at 289 basis points today, compared with 321 basis points a month ago.
Forward-rate agreements used to bet on three-month interest rates in three months traded at 5.39 percent today. That’s 64 basis points below the three-month Budapest Interbank Offered Rate, indicating a benchmark rate of 5.25 percent to 5.5 percent in March.
Hungary’s rate cuts follow those of central banks in eastern Europe, where price growth is slower. The Czech central bank reduced the main two-week repurchase rate to a record-low 0.05 percent on Nov. 1, almost three-quarters of a point less than the euro-area benchmark. Czech inflation in November was 2.7 percent from a year earlier.
Central bankers in Poland, where inflation was within the bank’s tolerance range last month at 2.8 percent, may cut its benchmark interest rate for a third month in January from 4.25 percent, policy maker Jerzy Hausner said Dec. 12. Romania kept borrowing costs steady at 5.25 percent in November with price growth at 4.56 percent and Turkey’s central bank cut the benchmark rate by 25 basis points to 5.5 percent today.
Rate cuts in countries like Hungary, which are indebted in foreign currencies, may fail to stimulate growth by risking currency depreciation and fueling inflation, European Central Bank President Mario Draghi said in Budapest Dec. 7.
Fiscal or monetary stimulus won’t solve Hungary’s growth problem, Simor, whose six-year mandate expires in March, said the same day. He said the government needed to create a predictable policy environment and agree with banks to ease their tax burden to stop a decline in lending.
A government policy turnaround, which the International Monetary Fund has also asked for to boost growth and unlock aid talks more than a year after Hungary asked for a financial safety net, is unlikely to happen after lawmakers last week approved a 2013 budget that relies on keeping extraordinary company taxes businesses blamed for a lack of investment.
That puts Orban, facing elections in 2014, focused on pressuring the central bank for monetary stimulus after Simor leaves his job, according to Luis Costa, an emerging-market strategist at Citigroup Inc. in London. The Cabinet wants a “new strategic alliance” with the central bank with the change of leadership, Economy Minister Gyorgy Matolcsy told state radio MR1 on Dec. 15.
“Orban will make sure the central bank will be fully aligned with the government’s policy in 2013, and the reshuffle in the NBH board will be a decisive step toward that goal,” Costa said. “This government is poised to ’force’ rates lower further down in the first quarter” as it looks for a “a lot of ‘help’ from the central bank on the monetary policy side.”
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