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Forint Drops on Minister’s Currency View as Yields Fall at Sale

Hungary’s forint weakened after Economy Minister Gyorgy Matolcsy argued against using the currency’s strength to fight the highest inflation rate in European Union. Borrowing costs at this year’s first bond auction fell.

The forint erased its earlier advance, weakening 0.8 percent to 292.0 per euro by 3:37 p.m. in Budapest. It strengthened 0.7 percent yesterday. The forint jumped 8.1 percent last year, the second-best performance worldwide, after the Polish zloty. Yields on 10-year bonds slid to a seven-year low at today’s sale.

Hungary must reject “traditional” economic models including policies of previous governments that kept the forint strong to control inflation and allowed the budget deficit to widen, Matolcsy wrote in his weekly column in the Heti Valasz newspaper today. The minister has been named a potential successor to central bank President Andras Simor whose term ends in March, according to media reports including on the Index news website.

“The danger is that on the back of these comments the forint might go significantly weaker,” Tim Ash, a London-based strategist at Standard Bank Group Ltd., said by e-mail.

Hungary sold 70.5 billion forint ($318 million) in bonds due in 2016, 2018 and 2023, 23.5 billion forint more than planned. The average yield on the 2023 securities was 6 percent, the lowest for that maturity since 2005, according to data from the Debt Management Agency on Bloomberg. Yields on three- and five-year notes also slipped.

The agency sold an additional 4.6 billion forint in bonds at a later, non-competitive tender.

Yields Fall

Borrowing costs have declined as the Magyar Nemzeti Bank cut its benchmark rate by a cumulative 1.25 percentage points in five consecutive months last year to 5.75 percent to help Hungary emerge from recession. Derivatives traders are pricing in at least a further one percentage point reduction this year.

The central bank will probably be the “least cautious” in the region in easing monetary policy as Matolcsy is the main contender to take over as president, Simon Quijano-Evans, a London-based economist at ING Groep NV, wrote in an e-mailed report today.

Yields on Polish bonds surged after central bank Governor Marek Belka said yesterday interest-rate cuts are nearing an end.

Hungary’s central bank should “bravely use unorthodox tools” to support economic growth, Matolcsy said in an interview with Budapest-based HirTV last month.

“Matolcsy’s appointment as central governor would be a controversial move, unlikely” to be appreciated by markets, Standard Bank’s Ash said.

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

To contact the editor responsible for this story: Wojciech Moskwa at wmoskwa@bloomberg.net

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