Jan. 29 (Bloomberg) -- Hungarian policy makers cut the main interest rate for a sixth month, helping to ease investor uncertainty over a change in the central bank’s leadership with a warning on the use of new monetary-policy tools.
The Magyar Nemzeti Bank lowered the two-week deposit rate by a quarter-point to 5.5 percent, the lowest since 2010 and still the European Union’s highest, matching the forecast of 27 of 28 economists in a Bloomberg survey. One saw no change. Widening the bank’s “unconventional” policy toolkit is only useful in the event of “acute financial-market turmoil,” the Monetary Council said in a statement after the announcement.
Prime Minister Viktor Orban will select a new central bank chief to succeed Governor Andras Simor, whose six-year mandate expires March 3. Non-executive rate-setters picked by Orban’s lawmakers in 2011 already hold a majority on the rate-setting panel and have wrested control from Simor and his deputies to push through rate cuts to stimulate the recession-bound economy. The forint fell in the past month on speculation the new governor may adopt new methods of easing.
“While it still cannot be ruled out that the new leadership will want to carry out drastic steps after March, without the support of the majority of Monetary Council members this may be more difficult,” Zoltan Arokszallasi, an analyst at Erste Group Bank AG, wrote in a research report today.
The Monetary Council’s urging of caution on unconventional tools helped strengthen the forint, Arokszallasi said.
The currency, which rose 0.8 percent to 295.79 at 5:47 p.m. in Budapest, has declined 1.5 percent against the euro this year. Strategists including those at Citigroup and Bank of America Corp., said Hungarian assets may weaken because of the potential shift in monetary policy.
Investors have pared expectations for rate cuts over the coming year to 96 basis points, compared with 128 basis points on Jan. 3, as indicated by forward-rate agreements for the three-month interest rate in 12 months. A basis point is 0.01 percentage point.
For further rate cuts, “favorable” market conditions need to remain in place and the inflation outlook must be in line with reaching the target of 3 percent, the Monetary Council said in a statement after the decision.
“They’re going to keep cutting because the Monetary Council is dominated in terms of numbers by the four external members and they’re obviously fairly dovish,” Nigel Rendell, an analyst at Medley Global Advisors in London, said by phone today. “They’re quite comfortable that the rate can go down further and if it causes weakening in the forint, that’s probably backing their case as well.”
The council was unanimous in formulating its opinion on monetary-policy tools, Simor said at a press conference in Budapest today, commending fellow policy makers for recognizing the need for caution.
“Unconventional tools must be used cautiously in a small, open economy such as Hungary where inflation has unfortunately not reached the target level, and where the country’s risk assessment isn’t among the best in the world,” Simor said after the decision. “It’s very important that the Monetary Council also mentioned that in its statement.”
The new central bank chief should “bravely use unorthodox tools” to provide monetary stimulus, including measures used by the European Central Bank and the Federal Reserve, Economy Minister Gyorgy Matolcsy, Simor’s most likely successor according to the Index news website, said last month.
Orban may name his candidate at a three-day ruling-party retreat that starts Feb. 5, Index reported Jan. 17, without citing anyone.
“Excessive rate cuts and/or monetary-policy measures leading to quantitative easing may undermine confidence and risk sudden forint weakening,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said in an e-mailed report sent yesterday, citing slowing inflation.
The new leadership is “almost certain” to stop paying interest on commercial banks’ mandatory reserves held at the central bank and will probably cut the rate on two-week bills, Mihaly Patai, the former head of the Hungarian Banking Association and chief executive officer of the local UniCredit SpA unit, said Dec. 20, according to the Budapest-based newspaper Vilaggazdasag.
Cutting the return on two-week bills would be tantamount to “significant” monetary easing, Simor said Jan. 18.
The central bank needs to step up its fight against inflation as policy makers have a “credibility problem” when investors forecast even lower borrowing costs and predict price growth faster than policy makers’ 3 percent target on a two-year horizon, he said. Consumer prices rose 5 percent last month from a year earlier, the slowest pace in a year.
Further monetary easing after five quarter-point rate cuts should be considered “very cautiously,” the International Monetary Fund said yesterday in a statement after an annual review of the economy. Lower rates are “unlikely to have a material impact” on lending and demand as long as the banking environment remained unchanged, it said.
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