Nov. 27 (Bloomberg) -- Hungary’s central bank cut its main interest rate for a fourth time in as many months and indicated more reductions as a deepening recession outweighed the European Union’s fastest inflation and a credit downgrade.
The Magyar Nemzeti Bank today reduced the two-week deposit rate by a quarter-point to 6 percent, still the EU’s highest. That matches the forecast of 23 of 24 economists in a Bloomberg survey. Policy makers voted for the cut with a “tight majority” over a proposal for no change, central bank President Andras Simor said.
The bank has lowered borrowing costs by 1 percentage point since July as policy makers focused on economic growth over inflation while international aid talks remain in limbo a year after they began. The Monetary Council is split, with the four non-executive members outvoting Simor and his two deputies in the past three months.
With the economy “still in the doldrums and with relative forint strength and stability, concerns over inflation still being close to double the NBH target are not a priority for the bulk” of rate setters, Timothy Ash, head of emerging-market research at Standard Bank Group Ltd. in London, said in an e-mail after the decision.
The forint, the world’s best-performing currency this year on investor bets the country will obtain an International Monetary Fund-led credit line, gained 0.6 percent to 280.15 per euro at 5:11 p.m. in Budapest. The currency fell 1 percent on Nov. 23 after a credit-rating cut by Standard and Poor’s.
“We don’t expect significant weakening in the forint since the market has already started to price in the rate cut,” Gergely Gabler, a Budapest-based analyst at broker Equilor Befektetesi Zrt., said today by e-mail. He predicts the main rate will fall to 4.75 percent by end-2014.
The credit-rating downgrade and uncertainty over an International Monetary Fund agreement may raise risk premium on Hungarian assets, the central bank said in a statement, adding that a loan agreement is “crucial.” Hungary is further away from a deal now than a year ago, when the Cabinet requested aid, Simor told reporters in Budapest.
“Persistent financial vulnerabilities mean that without an IMF deal in place the bank could be forced into rate hikes to defend the forint if faced with a fresh deterioration in investor sentiment,” William Jackson, a London-based economist at Capital Economics Ltd., said in an e-mail today.
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 will consider further rate cuts if data in the “coming months confirm that the improvement in financial market sentiment continues and the medium-term outlook for inflation remains consistent with the 3 percent target,” the Monetary Council said in the statement.
An “equilibrium interest rate” would be 4.5 percent to 5 percent, central bankers Andrea Bartfai-Mager, Ferenc Gerhardt and Gyorgy Kocziszky said Nov. 6.
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.
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 within the EU limit of 3 percent of economic output.
Hungary is in its second recession in four years and talks with the IMF over a credit line of about 15 billion euros ($19.4 billion) remain deadlocked after one year. The economy shrank 1.5 percent from a year earlier in each of the last two quarters as the euro area’s debt crisis saps demand for exports and domestic demand declines.
The cost of insuring Hungarian debt against non-payment for five years using credit-default swaps has fallen to 292 basis points, compared with 277 basis points at the beginning of November and 735 basis points on Jan. 5, 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 the previous month. 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 country will “significantly” overshoot the 3 percent inflation target this year and next year, Simor said, adding that the majority in the Monetary Council say the price-growth target is attainable in 2014.