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Hungary Yields Drop to Six-Week Low Before Central Bank Meeting

Hungary’s 10-year bond yields dropped to the lowest in more six weeks on speculation central bank policy makers meeting tomorrow will extend half a year of consecutive interest rate cuts.

Borrowing costs have fallen as traders increased bets the Magyar Nemzeti Bank will carry on its monetary easing cycle. Central bank President Andras Simor, whose term ends this week, has opposed lowering rates and has been outvoted each month since August by four Monetary Council members appointed by the ruling Fidesz party. Simor’s two deputies are also set to leave office in March and July respectively.

“This dovish dynamic is only set to intensify as the remaining ‘internal’ members are replaced by government appointed sympathisers,” Christian Lawrence, a London-based strategist at Rabobank International, wrote in an e-mailed report today.

Ten-year yields declined one basis point, or 0.01 percentage point, to 6.234 percent by 3:19 p.m. in Budapest, the lowest since Jan. 10. The forint was steady at 293.7 per euro after weakening 0.8 percent so far this year.

Policy makers will cut rates by 25 basis points to 5.25 percent tomorrow, according to all 26 economists surveyed by Bloomberg.

Forward-rate agreements fixing interest in one month fell three basis points, or 0.03 percentage points, to 5.21 percent. The FRA contracts traded 20 basis points below the Budapest Interbank Offered Rate. Twelve-month FRA contracts fell two basis points to 4.31 percent.

“A 4 percent rate is probably the lowest the NBH would go to, even under an ideal scenario,” Pasquale Diana, a London-based economist at Morgan Stanley, wrote in an e-mailed report today after meeting central bank officials in Budapest.

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