Hungary’s central bank kept borrowing costs unchanged for a second month after considering cutting rates for the first time in a year as a surge in the forint and lower credit risk outweighed stalling bailout talks.
The Magyar Nemzeti Bank today left the two-week deposit rate at 7 percent, the European Union’s highest benchmark rate, matching the forecast of all 22 economists surveyed by Bloomberg News. Policy makers considered cutting the rate by a quarter point before “overwhelmingly” backing no change, central bank President Andras Simor told a news conference in Budapest.
Hungary should maintain borrowing costs until agreeing on an International Monetary Fund-led loan, which may allow lower rates, policy makers Ferenc Gerhardt and Gyorgy Kocziszky said Feb. 15. The central bank unexpectedly held rates last month as four first-year members of its rate-setting board, including Gerhardt and Kocziszky, outvoted Simor and his two deputies, who sought a third successive half-point increase.
“The central bank is awaiting the results of the EU-IMF talks” and may cut the main rate if a deal is reached, Istvan Horvath, a portfolio manager at the Budapest investment unit of KBC Groep NV, said by e-mail.
The forint fell 0.1 percent to 291.16 per euro at 4:50 p.m. in Budapest. It has risen 8.2 percent this year against the euro, the most among currencies tracked by Bloomberg, after Prime Minister Viktor Orban pledged Jan. 5 to come to a “quick” agreement with the IMF and the EU on a loan. It fell 16 percent in the second half of last year, the most in the world.
The cost of insuring Hungarian government debt against non-payment using credit-default swaps fell to 510.7 basis points today from a record 735 points on Jan. 5, before Orban’s pledge, according to data provider CMA, which is owned by CME Group Inc. and compiles prices from dealers in the privately-negotiated market. A basis point is 0.01 percentage point.
Forward-rate agreements, used to bet on three-month interest costs in one month, fell 7 basis points to 7.415 percent. The Budapest Interbank Offered Rate traded at 7.36 percent.
Hungary’s risk assessment and investor appetite for risk has changed “significantly” in the past month, Simor told reporters today. To ensure a “sustained improvement” in risk, Hungary needs to come to an agreement on an IMF loan, Simor said.
“High volatility of financial markets over the recent period continues to warrant a cautious policy stance,” the Monetary Council said in a statement after the decision.
Orban is trying to revive talks for a bailout, which he sought in November after the forint fell to a record low against the euro and the country’s sovereign-credit rating was cut to junk. Talks broke down the following month after the EU and the IMF said draft legislation threatened central bank independence.
Hungary can’t start talks on an international loan until the government meets preconditions, including addressing concerns on monetary policy, the judiciary and the data-protection agency. The EU has no deadline or timeline to assess Hungary’s Feb. 17 response on the infringement procedures, a European Commission spokesman told reporters on Feb. 21.
‘In the Air’
“It’s in the air” that Hungary’s judicial reform may become a European court case, Deputy Prime Minister Tibor Navracsics told M1 state television today, casting doubt over Orban’s pledge to resolve disagreements quickly in order to move on to the negotiation phase.
“Sentiment towards Hungary has generally improved over the past few weeks, but there are still many risks ahead,” Benoit Anne, head of emerging-market strategy at Societe Generale SA, said in an e-mail today. “In particular, we fear that market participants may be overly optimistic about the chances of the authorities securing an IMF program fairly quickly, given the outstanding issues that need to be addressed.”
The inflation rate rose to 5.5 percent in January, the highest since April 2010, from 4.1 percent in December. The Monetary Council doesn’t need to react to a one-time jump in prices, Gerhardt and Kocziszky said.
Policy makers shouldn’t draw “far-reaching conclusions” from a single data, Simor said.
A “sustained higher inflation path” would justify a rate increase, central bank Vice President Ferenc Karvalits said Feb. 17. Policy makers target an inflation rate of 3 percent.
“We believe further confirmation about securing an IMF deal and additional fiscal austerity measures for 2013 may be needed to improve the inflation outlook and contribute to further narrowing in risk premiums, which may provide arguments for the Monetary Council to initiate a gradual rate-cutting cycle,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in a report today.
The currency rallying to the 275-285 forint per euro range may prompt rate cuts of as much as 2 percentage points, as long as an IMF loan is obtained “swiftly” and investors’ appetite for risk is maintained, Neil Shearing, chief emerging markets economist at Capital Economics Ltd. in London, said in an e-mail.
“We remain skeptical on both fronts,” Shearing said. “Accordingly, we think the risks to the forint lie on the downside. We would not be surprised to see it breach 300 per euro over the coming months. To the extent that interest rates are changed at all over the next three months, we believe the balance of risks is still skewed towards further hikes.”