Hungary to Raise EU’s Highest Rates After IMF Talks Stall

Hungary will probably increase the European Union’s highest benchmark interest rate after the trading bloc and the International Monetary Fund suspended talks about a bailout, threatening to pressure local assets.

The Magyar Nemzeti Bank will today raise the benchmark two-week deposit rate by a half point for a second month to 7 percent, according to 15 of 21 economists surveyed by Bloomberg. Two predicted a quarter-point increase and five forecast no change. The decision will be announced at 2 p.m. in Budapest. Traders’ one-month interest-rate bets rose to a two-year high yesterday.

The central bank raised the benchmark rate on Nov. 29 for the first time since January and said it was ready for further monetary tightening if warranted by the outlook for inflation and risk perception. The forint weakened on Dec. 16 when the EU and the IMF interrupted talks with Hungary after Prime Minister Viktor Orban moved to curb the central bank’s independence.

“The freeze in the informal talks is likely to deliver underperformance of Hungarian assets in the final weeks of December and raises the likelihood that the Monetary Council will hike rates 50 basis points,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., wrote in a research report yesterday. Gargyan earlier expected a 25 basis point rise in the base rate, she added. A basis point is 0.01 percentage point.

Forint, Forward Agreements

The forint appreciated less than 0.1 percent to 302.92 per euro by 9:40 a.m. in Budapest. It weakened 12 percent in the second half of 2011, the worst performance among more than 170 currencies tracked by Bloomberg.

Forward-rate agreements used to bet on three-month interest costs in one month fell 16 basis points to 7.17 percent after reaching the highest since Sept. 2009 yesterday. The Budapest Interbank Offered Rate, to which the FRAs settle, traded at 7.01 percent at yesterday’s close.

The Ceska Narodni Banka in Prague has left the two-week repurchase rate unchanged at a record-low 0.75 percent since May 2010, a quarter of a percentage point below the European Central Bank’s main refinancing rate after a 25 basis point ECB cut this month. Russia’s central bank last month left the refinancing rate at 8.25 percent. Romanian policy makers resumed cutting rates on Nov. 2, bringing borrowing costs to a record-low 6 percent.

‘Worsening Risk’

Hungary’s credit-default swaps, which measure the cost of insuring government debt against non-payment, traded at 583 basis points yesterday, compared with 585 basis points at the end of last month, according to data provider CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers.

“The central bank emphasized the worsening risk perception and the inflationary impact of a weaker forint at its last rate decision,” Balint Torok, an analyst at Buda-Cash Brokerhaz Zrt., wrote in a research report yesterday. “The focus will most likely remain on financial stability at the upcoming meetings.”

Consumer prices advanced 4.3 percent in November from a year earlier, the most since April and faster than economists forecast, after a 3.9 percent rise in October, the statistics office in Budapest said on Dec. 13.

Hungary’s ruling Fidesz party yesterday submitted amendments to the draft law which was criticized by the European Central Bank for potentially hurting the bank’s independence. The government failed to address some of the ECB’s key concerns, Magyar Nemzeti Bank President Andras Simor told lawmakers yesterday.

The central bank may keep borrowing costs unchanged on the basis that markets stabilized since the November rate decision, according to UniCredit SpA.

“That said, a rate hike is likely to be discussed,” Gillian Edgeworth, a London-based economist at UniCredit, and colleagues wrote in a research report dated Dec. 16.

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