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Hungary Should Hold Rates Until IMF Deal, Policy Makers Say

Ferenc Gerhardt And Gyorgy Kocziszky
Ferenc Gerhardt, left, and Gyorgy Kocziszky, both members of the monetary council at the Magyar Nemzeti Bank, Hungary's central bank, pose for a photograph inside the bank's headquarters in Budapest. Photographer: Akos Stiller/Bloomberg

Feb. 16 (Bloomberg) -- Hungary’s central bank should keep borrowing costs unchanged until the government agrees on an International Monetary Fund bailout, which may allow rate cuts, policy makers Ferenc Gerhardt and Gyorgy Kocziszky said.

The bank should adopt a “wait-and-see” approach until an IMF deal, Gerhardt and Kocziszky said yesterday in an interview in Budapest. The rate-setting Monetary Council is ready to react “immediately” to market developments if needed, Gerhardt said.

Gerhardt and Kocziszky are two of four first-year rate-setters who outvoted central bank President Andras Simor and his two deputies last month to unexpectedly keep the benchmark two-week deposit rate unchanged at 7 percent, the highest in the European Union, after back-to-back increases. Simor and his two deputies backed a half-point increase.

“A wait-and-see approach is definitely right until there is an agreement with the IMF and the EU,” Gerhardt said. An IMF deal may “strengthen” the case for the “start of a rate-cut cycle,” Kocziszky said.

The forint yesterday rose to the highest level against the euro since September and has strengthened 10 percent, the most in the world, since Premier Viktor Orban pledged Jan. 5 to work toward a “quick” agreement with the IMF and the EU. The currency weakened 0.8 percent to 293.78 by 9:46 a.m. in Budapest and the benchmark BUX stock index retreated 1.6 percent.

IMF Reversal

Orban reversed a policy of shunning international aid after the forint plunged 16 percent in the second half of 2011, the most in the world, and Hungary’s sovereign credit was cut to junk at Moody’s Investors Service, Fitch Ratings and Standard and Poor’s.

Hungary is trying to revive talks with the IMF and EU after negotiations broke down in December over new legislation on the central bank. The government will reach a deal in the first half, Economy Ministry State Secretary Zoltan Csefalvay said Feb. 14.

Rate-setters were split last month as the majority said January’s rise in Hungarian asset prices reflected a “sustained trend” of improving country risk, according to the minutes of the Jan. 24 meeting, published yesterday. Others said this was “primarily” caused by an increase of global risk appetite, the minutes show.

“The government clearly and decisively committed itself to an agreement with the IMF,” Gerhardt said. “This justifies a calm, wait-and-see attitude.”

Cutting Rates

An IMF agreement is necessary to open the way for cutting interest rates, Gerhardt and Kocziszky said. Developments in the euro area, oil prices and inflation will also determine whether rate cuts are possible, Gerhardt said.

“I’m reading that London-based economists are saying we can return to a 6 percent rate by the end of the year,” Gerhardt said. “This really depends on whether the agreement with the EU and the IMF is reached, when it’s reached, its contents, the amount, and the conditions.”

The central bank’s maneuvering room is “limited” and “monetary easing may pose financial stability risks” because it may lead to the weakening of the forint, boosting the level of debt, of which 65 percent is denominated in foreign currencies, Simor said today at a conference in Budapest.

An IMF agreement may strengthen the credibility of government policy and reduce financing costs, Simor said.

‘Meaningful Steps’

Investors will “calmly wait” for Hungary’s negotiations with the IMF and the EU “as long as they believe the government’s communication is realistic” and that the Cabinet “has taken and will take meaningful steps to reach an agreement,” Kocziszky said.

Investors are wrong to assume that an agreement with the two institutions is a “done deal” as a rally in local assets may make the government less willing to compromise on legislation and economic policy, Tim Ash, the head of emerging-market research at the Royal Bank of Scotland in London, said in an e-mail after meeting government officials and Simor.

“The market still seems to assume that an IMF agreement is a ‘done deal,’ but our overall impressions from the trip remain that this is certainly not the case,” Ash said.

The Monetary Council doesn’t need to react to a one-time spike in the inflation rate, which rose to 5.5 percent in January, the highest since April 2010, from 4.1 percent in December, Gerhardt and Kocziszky said. Policy makers target inflation of 3 percent.

VAT Increase

The acceleration in price growth was caused by an increase in the value-added tax rate and a weakening currency boosting fuel prices, Kocziszky said. Policy makers need to focus on trends and not a single piece of data, Gerhardt said.

Both rate-setters denied that a split had emerged in the Monetary Council with the four first-year rate setters, appointed in 2011 with ruling-party backing, on one side and Simor and his two deputies on the other. The Economy Ministry objected to two 50 basis-point rate increases in November and December.

“There are seven independent people” in the Monetary Council, Kocziszky said. “On fundamental questions, I think there are no differences between the seven. There are differences on how I evaluate certain processes and how they manifest themselves in my context.”

To contact the reporters on this story: Zoltan Simon in Budapest at Edith Balazs in Budapest at

To contact the editor responsible for this story: Balazs Penz at

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