Hungary’s Central Bank Flags Slower Rate-Cut Pace

Hungary’s central bank said it will probably slow the pace of interest-rate reductions after 17 consecutive cuts.

The Magyar Nemzeti Bank cut the two-week deposit rate to a record-low 3 percent from 3.2 percent, matching the forecasts of all 19 economists in a Bloomberg survey. The bank, which lowered its inflation forecast for this and next year, said “a reduction in the increment is likely to be warranted.”

Policy makers are trimming borrowing costs to buttress the recovery from a recession last year. The lack of inflation pressure gives rate setters room to ease borrowing conditions further, central bank President Gyorgy Matolcsy said Nov. 28. Matolcsy in July had flagged 3 percent as the low-end of rate cuts as investors speculate when the Federal Reserve will start tapering its quantitative easing program.

“The domestic monetary-policy room is getting narrower because of the situation surrounding the phasing-out of the Fed’s asset-purchase program,” Budapest-based brokerage Equilor Befektetesi Zrt. said in an e-mail, predicting a 10 basis-point cut to 2.9 percent next month.

Forint Gains

The forint strengthened 0.2 percent to 299 per euro as of 3:22 p.m. in Budapest. It’s gained 0.9 percent against the euro this month, the best performance among 24 emerging-market currencies tracked by Bloomberg. The yield on benchmark 10-year state debt fell to 5.69 percent from 5.9 percent a month ago.

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 inflation rate was unchanged at 0.9 percent in November, remaining below the central bank’s 3 percent medium-term target since February. The bank cut its inflation forecast to an average of 1.7 percent this year from a 2 percent projection in September. Policy makers now see price growth averaging 1.3 percent in 2014 compared with 2.4 percent earlier. The consumer price index may grow 2.8 percent in 2015.

Required Easing

“The projection in the December report implies that further policy easing is likely to be required in order to deliver price stability in the medium term,” policy makers said in their statement.

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, the Czech Republic and Russia have left rates unchanged.

Emerging-market countries are benefiting from the U.S. Fed’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. Fed policy makers meet today and tomorrow to decide whether to start curtailing the pace of purchases.

“Considering perceptions of the risks associated with the economy as well as the improvement in the pace of economic growth, further easing of monetary policy may follow, but a reduction in the increment is likely to be warranted in the future,” Hungary’s central bank said today.

The bank started lowering the main rate from 7 percent in August 2012, proceeding in quarter-point steps until July and 20 basis point reductions since then.

Derivatives Bets

Forward-rate agreements used to wager on three-month interest rates in three months fell 7 basis points to 2.82 percent. That compares with the 3.17 percent Budapest interbank offered rate today.

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.

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. Growth may average 1.1 percent this year, 2.1 percent in 2014 and 2.4 percent in 2015, the central bank forecast today.

In addition to rate cuts, the central bank is providing 2.75 trillion forint ($12.6 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

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.