Nov. 27 (Bloomberg) -- Hungary’s central bank will probably cut its main interest rate for a fourth month as a deepening recession outweighs the European Union’s fastest inflation and a credit-rating downgrade.
The Magyar Nemzeti Bank will reduce the two-week deposit rate by a quarter-point to 6 percent, still the EU’s highest, according to 23 of 24 economists in a Bloomberg survey. One forecast no change. A decision will be announced at 2 p.m. in Budapest followed by a news conference an hour later.
The bank lowered borrowing costs by 0.75 percentage point since July as policy makers focused on economic output instead of accelerating price growth. The moves highlighted the split in the Monetary Council as the four non-executive members outvoted central bank President Andras Simor and his two deputies for a third month.
The government’s appointed members to the council “remain focused on supporting the recessionary economy with further rate cuts, while inflation is showing initial signs of cooling,” Phoenix Kalen and Demetrios Efstathiou, strategists at the Royal Bank of Scotland in London said in a report yesterday. “The easing cycle will likely continue with 25 basis point cuts at the December and January meetings” as well.
The forint, the world’s best-performing currency this year as investors bet the country will obtain an International Monetary Fund-led credit line, dropped 1 percent against the euro on Nov. 23, recouping about half of its losses yesterday. It traded at 280.8 per euro at 12:38 p.m. in Budapest.
The yield on the government’s benchmark 5-year bonds fell two basis points, or 0.02 percentage point, to 6.39 percent.
The central bank’s rate-cutting “strategy can turn out to be dangerous for Hungary once risk-aversion returns: the forint may depreciate to as much as 287 against the euro after today’s expected cut,” analysts at DZ Bank AG said in a note.
Rate setters across eastern Europe are following their counterparts in the U.S. and U.K. with cuts to halt an economic slowdown sparked by the continent’s sovereign-debt crisis.
Hungary has room to lower rates as the risk assessment improves and the inflation target remains within reach on the policy horizon, central bankers Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said Nov. 6. The “equilibrium interest rate” is 4.5 percent to 5 percent, they said.
“After external MPC members indicated that the equilibrium interest rate, which helps growth without boosting inflation, is about 5 percent, we expect a rate cut at” the meeting, Istvan Horvath, director at the Budapest investment management unit of KBC Groep NV, said in a note. “Both the forint and domestic bonds have reacted positively to rate cuts so far, therefore monetary easing may continue as long as local assets remain stable.”
A decision by Standard and Poor’s to cut Hungary’s credit rating to two steps below investment grade on Nov. 23 “may not deter” rate-setters from lowering borrowing costs further, economists at Morgan Stanley, Royal Bank of Scotland and Citigroup Inc. said.
S&P lowered the country’s long-term foreign- and local-currency sovereign ratings one level to BB, saying “unorthodox” tax policies pursued by Prime Minister Viktor Orban’s government erode economic-growth prospects. The grade, on par with Portugal and Turkey, has a stable outlook, said S&P.
Orban backtracked on an earlier promise to reduce a special bank tax by half from 2013 as part of a salvo of tax measures aimed at keeping the budget deficit below a European Union limit of 3 percent of economic output.
Hungary is in its second recession in four years and talks for a credit line of about 15 billion euros ($19.4 billion) with the IMF remain deadlocked after one year. The economy shrank 1.5 percent in the second and third quarter as the euro area’s debt crisis saps demand for exports and domestic demand declines.
“With the economy stuck in recession and stagnation for a few more quarters, we think that the central bank will continue to look through first-round inflation shocks, and will cut rates significantly, even in the face of some potential forint weakness,” Pasquale Diana and Jaroslaw Strzalkowski, analysts at Morgan Stanley said in a report yesterday.
The benchmark rate may fall to 5 percent by mid-2013 even as the economy stagnates and inflation averages 5.3 percent versus the central bank’s goal of 3 percent, according to the report.
The cost of insuring Hungarian debt against non-payment for five years using credit-default swaps fell to 298 basis points, compared with 281 basis points at the beginning of November and 598 basis points a year ago, according to data compiled by Bloomberg. Higher spreads indicate a worse risk perception.
Hungary has benefited from the stimulus of central banks such as the U.S. Federal Reserve and the European Central Bank, easing debt financing pressure as investors hunt for higher-yielding assets. The country will do “all it takes” to keep its budget deficit within EU limits, the Economy Ministry said Nov. 19.
The inflation rate declined to 6 percent in October, still the EU’s highest, from 6.6 percent a month earlier. Central bank staff forecast in September that with a main interest rate of 6.75 percent, the inflation goal would only be reached in the second half of 2014.
The four non-executive members said Hungary’s lack of growth would have a disinflationary effect as cost shocks fade, while Simor and his deputies considered that monetary conditions should have been kept unchanged to show a commitment to tackling inflation, according to the minutes of the last meeting, published Nov. 14.
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