Hungary Cuts Main Rate to Record as Matolcsy Targets Growth

Hungary's Central Bank President Gyorgy Matolcsy
Gyorgy Matolcsy, whose appointment as central bank chief last month sparked a weakening in the forint, is “only at the beginning of renewing monetary policy,” he said in an interview with state news service MTI. Photographer: Akos Stiller/Bloomberg

Hungary’s central bank lowered its benchmark interest rate to a record as new President Gyorgy Matolcsy seeks to help the economy emerge from a recession with inflation near a 39-year low.

The Magyar Nemzeti Bank cut the two-week deposit rate by a quarter-point to 4.75 percent today, easing policy for a ninth month and matching the projection of 25 of 26 economists in a Bloomberg survey. Hungary will pursue a “cautious” monetary policy stance given “the contrast between the benign financial market environment and weak real economic activity,” the Monetary Council said in a statement today.

“The Council will consider a further reduction in the policy rate if the medium-term outlook for inflation remains in line with the bank’s 3 percent target and the improvement in financial market sentiment is sustained,” according to the statement posted on the central bank’s website.

Matolcsy, whose appointment as central bank chief last month sparked a weakening in the forint, is “only at the beginning of renewing monetary policy,” he said in an April 18 interview with state news service MTI. Inflation will remain below the bank’s target in 2013 and will “settle close” to the goal in 2014, rate setters said in today’s statement.

“The surprise would have been if the central bank hadn’t cut interest rates today, given the massive decline in bond yields in recent weeks and with inflation at a 38-year low,” Zoltan Arokszallasi, a Budapest-based economist at Erste Group Bank AG, said in an e-mail today. Hungary has room to cut rates to 4 percent without posing a threat to financial assets, according to the e-mail.

Forint Slides

The forint weakened for a fifth day, heading for its longest losing streak since January and pushing this year’s loss to 2.8 percent. The currency traded 0.2 percent lower at 299.60 per euro at 3:19 p.m. in Budapest. Yields on the government’s five-year bonds slid 10 basis points, or 0.1 percentage point, to 4.958 percent, a record low.

Hungary’s inflation and economic outlook “are consistent with a lower interest rate,” according to the statement.

The bank is targeting an “equilibrium” interest rate that doesn’t fuel inflation and helps growth, Ferenc Gerhardt, the newly appointed deputy governor, said on April 15. Such a rate is between 4.5 percent and 5 percent, Gerhardt said in a Nov. 5 interview.

Since then, government-mandated household energy-price cuts helped push the inflation rate to 2.2 percent last month, the lowest in almost 39 years. Price growth will average 2.6 percent this year and 2.8 percent in 2014, the central bank said March 26.

‘Souring’ Sentiment

“Falling inflation and an economy struggling to escape from recession mean that further interest-rate cuts are likely in Hungary,” William Jackson, economist at Capital Economics Ltd. in London, said in an e-mail today. Currency concerns will prevent aggressive steps to ease policy and a “souring” in market sentiment may force rate-setters to halt or even reverse the easing cycle, he wrote.

Investors expect the benchmark rate to drop to 4 percent or lower in the next six months, forward-rate agreements show.

Central banks around the world are easing monetary policy in a bid to boost growth. The Bank of Japan is aiming to lift inflation to 2 percent by 2015, while the European Central Bank stands ready to purchase bonds of stressed nations. The Federal Reserve has extended more than $1 trillion worth of unprecedented credit to a single industry: housing.

‘No Doubt’

“Growth remains anemic at current levels and we have no doubt that the government and the central bank will gear up for more measures to boost growth,” economists at Societe Generale SA in London said in an e-mailed note yesterday. More easing is in the pipeline and the “powers that be in Hungary will want to avoid a steady strengthening of the currency.”

The central bank announced a plan to offer preferential loans to small businesses and use foreign-currency reserves to lower external debt after the economy contracted 1.7 percent last year. The bank plans to use 10 percent of foreign-currency reserves to cut the country’s short-term external debt under the plan.

Policy-makers expect growth to resume this year and the government expects the economy to expand 0.7 percent in 2013. That contrasts with the European Commission’s forecast of a 0.1 percent contraction this year.

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