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Forint Falls to 3-Week Low as Draghi Sides With Simor on Rates

The forint weakened to its lowest in three weeks as European Central Bank President Mario Draghi said in Budapest indebted countries that reduce interest rates risk currency depreciation.

The Hungarian currency fell 0.2 percent to 283.72 per euro by 4:48 p.m. in Budapest, after earlier sliding as much as 0.3 percent to its weakest intraday level since Nov. 19. The forint has lost 0.9 percent this week, the most among major emerging-market peers tracked by Bloomberg.

Draghi defended policies championed by Andras Simor, the Hungarian central bank chief battling monetary easing driven by the majority of his rate-setting panel. Hungary is the most indebted formerly communist European Union member where policy makers have cut interest rates in each of the last four months.

“In these circumstances, lowering the policy rate to stimulate the economy may risk sparking depreciation pressures on the domestic currency at some point in time,” Draghi said at a conference today, without naming Hungary specifically. “Depreciation of the currency may in turn further fuel inflation and offset the impact of economic stimuli through negative balance sheet effects on consumption and investment.”

The yield on 10-year forint-denominated bonds fell one basis point, or 0.01 percentage point, to 6.73 percent, the least since Oct. 25, data compiled by Bloomberg show.

The Magyar Nemzeti Bank cut its benchmark two-week deposit rate to 6 percent in November and indicated more potential reductions as a deepening recession outweighed concern for the EU’s fastest inflation and as the forint has stabilized. Simor and his deputies were against the easing, which was pushed through by panelists appointed by ruling-party lawmakers.

Hungarian industrial output unexpectedly slumped in October in a sign the nation’s recession may extend into the fourth quarter.

Factory output adjusted for the number of workdays dropped 3.8 percent from a year earlier, the steepest decline in almost three years, the statistics office in Budapest said today. Economists had predicted a 0.6 percent gain, according to the median of 12 estimates in a Bloomberg survey.

“Industrial production surprised on the downside,” Daniel Hewitt, a London-based senior economist for emerging markets at Barclays Capital, wrote in an e-mail to clients today. “No signs of recovery yet.”

Hungary is battling its second recession in four years as trade and banking links with a contracting euro region hurt growth. Gross domestic product shrank for a third consecutive quarter, final data showed today, as measures to cut the budget deficit to avoid a freeze of European Union funding damped consumption.

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