Hungary Cuts Key Rate to Record 3% as More Price Cuts Flagged

Hungary cut its benchmark interest rate to a record low as inflation slowed to less than 1 percent and the government pledged to trim utility prices further.

The Magyar Nemzeti Bank lowered the two-week deposit rate to 3 percent from 3.2 percent, matching the forecasts of all 19 economists in a Bloomberg survey. The central bank will publish a statement and new economic projections at 3 p.m. in Budapest.

Policy makers are “likely to cite low inflation as supportive of modest further cuts below 3 percent,” Phoenix Kalen, London-based a strategist at Societe Generale SA, said by e-mail before the decision.

The central bank has lowered borrowing costs for 17 consecutive months to buttress the recovery from a recession last year. The lack of inflation pressure gives rate setters room to ease borrowing conditions further and maintain “sustainably loose monetary conditions,” central bank President Gyorgy Matolcsy said Nov. 28. Price growth is slowing because of government-mandated cuts in utility tariffs.

The forint has gained 0.9 percent against the euro this month, the best performance among 24 emerging-market currencies tracked by Bloomberg. It traded 0.2 percent stronger at 298.85 per euro at 1:16 p.m. in Budapest. The yield on the benchmark 10-year government bond fell to 5.72 percent from 5.9 percent a month earlier.

Utility Bills

Hungary is considering a third round of utility-price cuts for households after slashing costs by 20 percent in two previous steps, Prime Minister Viktor Orban said Dec. 13. The government, which faces elections in 2014, ordered an 11.1 percent reduction in utility charges starting Nov. 1, adding to a 10 decrease at the start of this year.

The bottom of the rate-cut cycle hinges on the outlook for inflation and the economy, the central bank told Bloomberg in a Nov. 28 response to questions. Matolcsy said in June that the main rate may fall to as low as 3 percent.

“We believe the central bank will continue the easing cycle next year” because inflation is set to slow further and price growth will disappear in January, economists including Zoltan Torok at Raiffeisen Bank Bank International AG’s local unit said in an e-mailed report.

Eastern European central banks are diverging as their economic fortunes differ. Serbia cut borrowing costs for a third month today after Romania lowered its benchmark for a fourth month Nov. 5. Poland and Russia both left rates unchanged.

Fed Boost

Emerging-market countries are benefiting from the U.S. Federal Reserve’s decision to maintain its $85 billion monthly bond-buying program. A reduction in the stimulus may prompt investors to pull back from riskier assets.

The decision at the Fed’s meeting this week will have a “vital” impact on global financial markets and “any sort of guidance from the Hungarian central bank on the interest-rate path in light of external events would be crucial,” Imre Kerekgyarto and Karoly Bamli, Budapest-based currency traders at Commerzbank AG, wrote yesterday by e-mail.

Forward-rate agreements used to wager on three-month interest rates in three months fell four basis points to 2.9 percent. That compares with the 3.17 percent Budapest interbank offered rate.

Policy makers in Budapest were split last month on how much to trim interest rates, with seven supporting the 20 basis point reduction and one voting for a 10 basis point cut, according to the minutes of the meeting published Dec. 4. Rate-setters saw room for further “cautious” rate cuts.

Gross domestic product rose 0.8 percent from the previous three months in the third quarter after a 0.4 percent quarterly advance in the April-June period. The inflation rate was unchanged at 0.9 percent in November, remaining below the central bank’s 3 percent medium-term target since February.

In addition to rate cuts, the central bank is providing 2.75 trillion forint ($13 billion) of interest-free funds to commercial lenders to boost credit to small and medium-sized companies.

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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