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Hungary May Slow Rate Cuts After Reduction to Record Low

Hungary Cuts Main Rate to Record as Focus Shifts to Ending Cycle
A Hungarian national flag flies outside the Magyar Nemzeti Bank, in Budapest. Photographer: Akos Stiller/Bloomberg

July 23 (Bloomberg) -- Hungary may slow the pace of interest-rate cuts after reducing the benchmark for a 12th month, Magyar Nemzeti Bank President Gyorgy Matolcsy said, brushing aside speculation of an end to the easing cycle.

The bank lowered the benchmark two-week deposit rate to 4 percent from 4.25 percent today, a 12th quarter-point cut, matching the forecast of all 21 economists in a Bloomberg survey. The end of the cycle may come between 3 percent and 3.5 percent, a level policy makers may reach in increments of less than 25 basis points, Matolcsy said.

“There is not just a possibility but a necessity to continue rate cuts,” Matolcsy told reporters in Budapest. Ten basis-point increments as opposed to quarter-point steps are “pragmatic” and “practical,” he said.

Hungary’s medium-term inflation outlook and financial stability allow more rate cuts to aid the economy’s recovery from a recession last year, Matolcsy said. Economists including the Budapest-based Equilor Zrt. brokerage had predicted that today’s reduction would be the penultimate in this easing cycle as the narrowing gap to rates in developed economies risks outflows from Hungarian assets.

Forint Drops

The forint weakened 0.5 percent to 295.80 per euro by 4:13 p.m. in Budapest. It’s gained 1.4 percent in the past three months, the best performance among more than 20 emerging-market currencies tracked by Bloomberg. The yield on the benchmark government bond due 2023 fell to 5.94 percent today from 6.9 percent a month earlier.

“By slowing down, they are allowing time to precisely find out how monetary policy and the data turn out on developed markets,” David Nemeth, an economist at KBC Groep NV’s K&H unit in Budapest, said by phone. “I don’t know if rate policy will be that much more predictable if they cut by 10 basis points.”

Central bankers across eastern Europe have been easing monetary policy as the euro area’s debt crisis saps demand for exports. Poland cut its main rate to a record 2.5 percent this month and Romania lowered its benchmark to a record 5 percent on July 1, the first reduction in more than a year.

‘Significantly Relaxed’

Czech central bank Governor Miroslav Singer said today that he wouldn’t mind “significantly relaxed” monetary conditions after the country’s benchmark rate has stayed at a technical zero since November.

As monetary authorities in countries such as the U.S. and the U.K. keep borrowing costs close to zero, Hungary’s central bank has combined 2.75 percentage points of rate cuts since August with a 750 billion-forint ($3.4 billion) plan to boost lending to small and mid-sized companies.

The bank lowered its inflation forecast and raised its economic-growth projection for this year on June 27, predicting that consumer prices will advance by an average of 2.1 percent and gross domestic product will increase 0.6 percent. Inflation was 1.9 percent from a year earlier in June, holding close to a 39-year low recorded in April because of government-mandated reductions in household energy prices.

Global concern that the U.S. Federal Reserve will pare monetary stimulus has eased, sending the MSCI Emerging Markets Index up 6 percent in the past two weeks. Fed Chairman Ben Bernanke said July 10 that asset purchases by the Fed may be reduced more quickly or expanded as economic conditions warrant, reassuring investors he wouldn’t cut off the stimulus if growth disappoints.

Hungarian policy makers will continue to be “cautious and conservative” in monetary-policy decisions, Matolcsy said.

“Increased volatility in sentiment in global financial markets and the uncertain outlook for global economic growth continue to pose a risk, which in turn calls for maintaining a cautious approach to policy,” the Monetary Council said today in a statement.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net

To contact the editor responsible for this story: James M. Gomez at jagomez@bloomberg.net

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