Hungary’s central bank cut its main interest rate to a record low and pledged “increased caution” as policy makers looked past a market rout sparked by the U.S. Federal Reserve saying it may phase out stimulus.
The Magyar Nemzeti Bank lowered the benchmark two-week deposit rate to 4.25 percent from 4.5 percent in an 11th consecutive quarter-point cut, matching the forecast of all 25 economists in a Bloomberg survey.
“As long as the outlook for inflation and the real economy justifies it, interest rates can be reduced further,” the bank said in a statement on its website after the decision. “However, increased caution is warranted in the volatile and rapidly changing global environment,”
Central bank President Gyorgy Matolcsy, who took over in March, wants to help ignite an economy emerging from a 2012 recession with inflation the slowest in almost 39 years. Hungary’s scope to ease is narrowing amid an emerging-market selloff after Fed Chairman Ben S. Bernanke said last week the U.S. central bank may start slowing the pace of its bond-buying program this year if the world’s biggest economy continues to improve.
The Hungarian central bank’s statement is predominantly “dovish” given growth risks in western Europe, while acknowledging the changing environment, which may limit the room in the easing cycle, Luis Costa, an emerging-market strategist at Citigroup Inc. said in an e-mail.
“All in all, I still believe the central bank will try to cut rates a few more times before it calls for a pause, in the absence of a major forint selloff,” Costa said.
The forint strengthened 0.7 percent to 297.13 euro by 4:10 p.m. in Budapest, paring its loss in the past five days to 1.2 percent, the second-biggest drop after the Polish zloty among more than 20 emerging-market currencies tracked by Bloomberg. The forint is still the best performer in the group this quarter with a 2.4 percent gain against the euro.
Global financial markets have become “more fragile” and a “marked deterioration in the financial environment may limit the room in which monetary policy can manoeuvre,” according to the Magyar Nemzeti Bank’s statement.
The central bank lowered its inflation forecast and raised its economic output projection for this year. Inflation may average 2.1 percent in 2013, rather than the 2.6 percent projection in March and the economy will expand 0.6 percent instead of 0.5 percent, it said on its website today. Price growth will probably average 3.2 percent in 2014, when gross domestic product will expand 1.5 percent, the bank said.
The yield on the government’s benchmark 10-year forint bond fell to 6.70 percent from 6.87 percent yesterday, the highest in six months, according to generic data compiled by Bloomberg. The cost to insure the country’s debt against non-payment for five years using credit-default swaps fell to 350 basis points from 366 yesterday, the highest since April 3, according to data compiled by Bloomberg.
“Although in recent weeks international sentiment deteriorated significantly, raising Hungary’s credit-default swaps and bond yields, the medium-term inflation outlook justified the central bank’s decision,” Gergely Gabler, an analyst at Equilor Befektetesi Zrt. in Budapest, said in an e-mail. Equilor expects the central bank to halt rate cuts after lowering the main rate to 4 percent.
Emerging-market central bankers are divided on how to respond to the volatility triggered by the Fed’s plans to taper its stimulus. Global investors pulled $6.9 billion from emerging-market debt funds in the four weeks through June 19, the most since 2011, EPFR Global data show. The MSCI All-Country World Index sank the most in more than a year last week.
Poland should avoid cutting rates next month as the risk of weakening the currency and triggering capital outflows outweighs any benefit to the economy, central bank policy maker Andrzej Kazmierczak said in a June 21 interview. The country’s next rate decision should be unaffected by the zloty’s deepest weekly plunge in almost two years, Jerzy Hausner, another rate setter, said the same day.
In Hungary, the central bank has complemented 2.75 percentage points of rate cuts since August with a 750 billion forint ($3.3 billion) plan to boost lending to small and mid-sized companies.
Hungary is playing catch-up in monetary easing after the central bank under its previous leadership held the benchmark rate at the highest level in the European Union until last year, citing the inflation outlook and risk levels.
Still, the bank “is considering ways to signal to the market the principles for ending the rate-cut cycle,” Vice President Adam Balog said May 31. The bank has an internal study on a “neutral interest rate” that doesn’t necessarily limit an easing or tightening cycle, Balog said.
“The Monetary Council is ready to act if financial-market conditions were to fundamentally reverse,” Janos Cinkotai, a non-executive member of the rate-setting Monetary Council said June 20. “The central bank has tools at its disposal to intervene in case of financial-market turbulence.”
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