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Hungary May Cut Main Rate to 6% on IMF, Citigroup Says

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May 9 (Bloomberg) -- Hungary may cut the European Union’s highest benchmark interest rate “significantly” once the government obtains a bailout from the International Monetary Fund and the EU, Citigroup Inc. said.

Hungary may obtain IMF help by the fourth quarter “at the latest,” cutting the risk premium on local assets, which will open the way for rate cuts as inflation is set to slow to the Magyar Nemzeti Bank’s 3 percent target by early 2014, Budapest-based Citigroup economist Eszter Gargyan wrote in a note to clients today.

Policy makers left the benchmark rate at 7 percent on April 24 for a fourth month as the government failed to meet conditions to start bailout talks, which Prime Minister Viktor Orban requested in November. The next day, Hungary won the go-ahead from the European Commission to start negotiations. No date has been set.

The central bank may gradually cut its benchmark rate by as much as 1.5 percentage points if global risk sentiment permits, Gargyan said, adding that Citigroup lowered its year-end rate forecast to 6 percent from 6.75 percent and sees “scope for further potential 50 basis-point cuts to 5.5 percent in the first quarter of 2013.”

Rate cuts may start in September, before the government obtains an aid deal, Gargyan said, referring to comments by central bank policy maker Ferenc Gerhardt to Reuters. Once aid talks start and progress is made in negotiations, the central bank can start lowering borrowing costs, Gerhardt said, Reuters reported late yesterday.

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

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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