The forint steadied after touching the lowest level in almost five months as Hungary’s central bank cut interest rates for a fifth straight month, bringing them to the lowest in two years.
The forint traded unchanged at 288.15 per euro by 5:20 p.m. in Budapest after weakening as much as 0.8 percent to 290.33, the weakest since July 25, before the decision was announced. Yields on the government’s benchmark 10-year bonds dropped five basis points, or 0.05 percentage point, to 6.42 percent, the lowest since April 2010.
The forint plunged the most in three months yesterday as investors prepared for the rate cut, which was predicted by all 19 analysts surveyed by Bloomberg. Traders also reacted to reports the Magyar Nemzeti Bank may resort to less conventional easing tools next year. The central bank today lowered its inflation and economic growth forecasts for 2013, projecting a slower recovery from the second recession in four years.
“We expect the central bank to continue monetary easing next year,” Gergely Gabler, a Budapest-based analyst at broker Equilor Befektetesi Zrt., wrote in an e-mailed report after the rate announcement. “While some players got unnerved by yesterday’s dive in the forint, the Monetary Council didn’t get scared.”
Hungary raised 75 billion forint ($343 million) in three-month Treasury bills at an auction earlier today, 50 percent more than planned and the highest amount raised from that maturity since at least 1995, according to data from the Debt Management Agency. The average yield was 5.63 percent, the lowest since September 2011.
Central bank President Andras Simor’s term expires in March and his successor will be “allied with the government” in boosting economic growth, Economy Minister Gyorgy Matolcsy said in a radio interview on Dec. 15.
“This does not sound too promising in light of the government’s choice of unorthodox fiscal measures in the past and its hostile approach towards the banking sector,” Zoltan Torok, a Budapest-based economist at Raiffeisen Bank International AG, wrote in an e-mail after the central bank decision.
The forint plunged 15 percent in the second half of 2011 after Prime Minister Viktor Orban’s Cabinet nationalized privately managed pension assets, levied special taxes on lenders and forced banks to take losses on foreign-currency loans, costing the nation its investment-grade credit rating.
The government may ask the new head of the central bank to limit the amount commercial banks can buy in two-week bills and make the central bank buy debt on the secondary market, hvg.hu reported last month, citing unidentified people in Orban’s ruling Fidesz party.
The forint’s swings this week revealed the fragility of investor confidence in Hungary, which monetary policy makers should keep in mind, Simor told reporters today.
Simor, who on Dec. 7 urged the bank to act “much more firmly” against inflation, which slowed to 5.2 percent in November, has been outvoted along with his two deputies in each of the past four rate meetings by non-executive members who want to spur an economy out of its second recession since 2008.
The four non-executive policy makers, appointed by Prime Minister Viktor Orban’s ruling party in 2011, have argued that the inflation rate may drop to the bank’s target in 2014 as cost shocks from energy and food prices fade. They have also pointed to the resilience of the currency and falling risk premium for supporting monetary easing.
The forint has gained 9 percent this year, the best performance among more than 100 currencies tracked by Bloomberg.
“This is just the beginning,” Ilan Solot, a London-based strategist at Brown Brothers Harriman, wrote in a research report today on Hungary’s monetary easing. “The government will soon appoint new members to the central bank’s board which will make it even more dovish.”