Hungary’s IMF Talks Create July Rate-Cut Room: Officials

Hungary’s IMF Talks Create July Rate-Cut Room, Rate Setters Say
The Magyar Nemzeti Bank on June 26 left its benchmark interest rate unchanged at 7 percent for a sixth month as a surging forint and a looming recession balanced concern over inflation. Photographer: Akos Stiller/Bloomberg

Hungary’s start on international aid talks next week creates room to begin cutting the European Union’s highest benchmark rate as early as this month, central bankers Ferenc Gerhardt and Gyorgy Kocziszky said.

Interest-rate reductions must be gradual as “safety above all else” remains the priority of monetary policy makers, Gerhardt said in a joint interview with Kocziszky in Budapest today. They are among the four non-executive rate setters in the seven-member Monetary Council.

The Magyar Nemzeti Bank on June 26 left its benchmark interest rate unchanged at 7 percent for a sixth month as a surging forint and a looming recession balanced concern over inflation. Hungary is scheduled to start loan talks with the International Monetary Fund, the European Union and the European Central Bank on July 17 after a seven-month delay caused by the government passing a central bank law the lenders said threatened monetary independence.

“The fact that the date for the” talks with the IMF, the EU and the ECB “has been set gives hope that things will improve and we want to put in place an interest-rate environment that gives incentives ahead of the start of a growth cycle,” Gerhardt said. “Naturally, there can be a rate cut this month, the possibility is there.”

The forint gained 9.2 percent against the euro this year as investors speculated that Hungary will obtain an IMF loan. The currency fell 15 percent, the most in the world, in the second half of 2011 as Prime Minister Viktor Orban’s policies, including the nationalization of private pension funds and forcing banks to swallow exchange-rate losses on foreign-currency mortgages, damaged investor confidence.

CDS Price

The cost of insuring against default on Hungary’s debt for five years using credit-default swaps fell to 508 basis points by 2:03 p.m. in Budapest from 785 basis points on Jan. 5, according to data compiled by Bloomberg. Hungary’s credit is rated junk.

The ECB last week cut its main interest rates by 25 basis points, taking the benchmark to a record-low 0.75 percent and the deposit rate to zero. The Czech central bank cut its main interest rate by a quarter-point to a record-low 0.5 percent on June 28. The Polish central bank, which surprised the market with a quarter-point increase in May, kept its benchmark rate at 4.75 percent on July 4.

A Hungarian rate cut on July 24, the first in 27 months, would follow a six-to-one decision to keep the rate unchanged last month. Council members then said the country’s risk premium needs to fall “persistently and substantially” and the outlook for inflation needs to improve before they can start lowering borrowing costs.

Inflation Accelerates

Hungary’s inflation, the fastest in the EU, accelerated to 5.6 percent last month from 5.3 percent in May, the statistics office in Budapest said today. The median estimate of 15 economists surveyed by Bloomberg was 5.4 percent. Policy makers target 3 percent price growth.

The pace of consumer-price increases is narrowing policy makers’ room to start rate cuts, Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in a report today.

Orban yesterday damped optimism about the start of bailout talks, telling HirTV that IMF officials will be in Budapest next week to “have a look around,” while negotiations will start “toward the end” of the European summer.

“Based on the rising CPI outlook and our expectation of increased market pressure before the government will compromise on fiscal conditions, we do not see scope for rate cuts to materialize before late 2012, when we expect loan talks to conclude,” Gargyan said a report earlier today.

‘No Obstacle’

The June inflation data “absolutely fit” into the central bank’s forecast and the rate may drop to the central bank’s target by the end of 2013, Kocziszky said. Policy makers will “look beyond” price increases caused by rising taxes and commodity price swings, Gerhardt said.

“We still think that there is no obstacle to starting a rate-cut cycle from the point of view of inflation,” Kocziszky said.

Rate cuts need to be gradual as the country “couldn’t handle another 8 to 10 forint decline in the exchange rate,” Gerhardt said. The currency weakened 0.2 percent to 288.6 per euro by 3:03 p.m. in Budapest.

“It must be stressed that this should be a very gradual process,” Gerhardt said. “If our benchmark rate were between 12 percent and 15 percent, the pace” of rate cuts “ would be 50 basis points, however our rate is half of that.”

Avoid Split

Hungary has kept the benchmark rate unchanged since January, which “in itself means a tightening of sorts” as the country’s risk premium has dropped and the forint has gained in the period, Kocziszky said.

Policy makers should close ranks behind rate cuts when the time comes, Gerhardt said, adding that he wants to avoid the Monetary Council giving the appearance of a split. The four non-executive members, appointed last year with ruling-party backing, united against MNB President Andras Simor and his two deputies in January, when they outvoted their proposal to raise the benchmark rate by half-point to 7.5 percent in favor of keeping the level unchanged.

“I really wish the president didn’t have to say at the time of the first rate cut that it was a close decision,” Gerhardt said. “I would like this decision to have as much support as possible because this would show strength.”

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