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Hungary Rate Cuts, Bailout Delay to Weigh on Forint, Erste Says

Oct. 3 (Bloomberg) -- The Hungarian central bank’s rate cuts will weigh on the forint in the coming year, with further risks from delays in the government’s bailout talks, according to Erste Group Bank AG.

The forint strengthened 0.1 percent to 285.77 by 12:04 p.m. in Budapest, paring its decline since last week’s interest rate cut to 1.1 percent, the worst performance after the South African rand’s 2 percent slide among more than 20 emerging-market currencies tracked by Bloomberg. The yield on Hungary’s 10-year forint notes was unchanged at 7.38 percent today, according to data compiled by Bloomberg.

The Magyar Nemzeti Bank reduced its benchmark two-week deposit rate by 25 basis points on Sept. 25 to 6.5 percent, still the highest in the European Union, to help Hungary emerge from recession. Rate-setters, who also reduced borrowing costs in August, voted to cut even as the central bank forecast inflation at an average 5 percent next year, above the 3 percent target and compared with an earlier projection of 3.5 percent.

“The path the central bank has chosen is risky and can easily result in a weaker forint,” Orsolya Nyeste and Zoltan Arokszallasi, Budapest-based analysts at Erste, the third-biggest western lender in eastern Europe, wrote in a note today. Erste changed its year-end projection for the forint to 292.5 per euro from an earlier 282.5, according to an e-mailed note.

Delays in Hungary’s negotiations for aid from the International Monetary Fund and the European Union, which the government requested almost 11 months ago, will also limit advances by the country’s bonds, Erste analysts said. The 10-year yield may be 7.4 percent at the end of the year, they said.

Intesa Sanpaolo SpA’s CIB Bank unit, the most accurate forecaster for the euro-forint rate in the six quarters to Sept. 30, changed its forecast for the end of 2012 to 285 from 283 and for the first quarter of 2012 to 285 from 281, Sandor Jobbagy, a Budapest-based analyst at the bank, said by phone today.

To contact the reporter on this story: Andras Gergely in Budapest at agergely@bloomberg.net

To contact the editor responsible for this story: Gavin Serkin at gserkin@bloomberg.net

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