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Hungary Central Bank Sees Room for Further Rate Cuts

Hungary's Central Bank
A pedestrian passes the Hungarian central bank, also known as Magyar Nemzeti Bank, in Budapest. Photographer: Akos Stiller/Bloomberg

Sept. 24 (Bloomberg) -- Hungary’s central bank cut its benchmark interest rate to a record low after inflation slowed and the U.S. Federal Reserve refrained from paring stimulus. Policy makers said they see room for further easing.

The Magyar Nemzeti Bank reduced the two-week deposit rate to 3.6 percent from 3.8 percent today in Budapest, matching the predictions of 15 of 20 economists in a Bloomberg survey. Further “cautious easing” may follow, it said in a statement.

Policy makers slowed the pace of rate cuts in August to 20 basis points after 12 months of quarter-point reductions as they seek to safeguard financial stability and the attractiveness of local assets. “Signs of stabilization” in financial markets, in addition to the outlook for inflation, economic growth and country risk, justify further cuts, they said.

The central bank wants to “slip below the radar with continual, smaller-than-normal cuts so they can get rates as low as possible,” Peter Attard Montalto, a London-based emerging-markets economist at Nomura International Plc, said by e-mail. The main rate will be reduced to 3 percent in 20 basis-point increments “in the months ahead,” he predicts.

The forint traded at 299.95 per euro by 3:33 p.m. in Budapest, unchanged after the rate decision and 0.5 percent weaker than yesterday. It’s slumped 1 percent in the last month. The yield on the benchmark government bond due 2023 has dropped to 5.8 percent from 6.5 percent a month ago.

Economic Forecasts

The central bank today raised next year’s economic-growth forecast and lowered its projection for inflation. Gross domestic product may rise 2.1 percent in 2014, up from an earlier estimate of 1.5 percent, while inflation may average 2.4 percent, down from a June forecast of 3.2 percent, it said.

Second-quarter economic growth slowed to 0.1 percent from the previous three months, compared with 0.6 percent in January-March. The inflation rate was 1.3 percent in August, remaining below the central bank’s 3 percent medium-term target for a seventh month.

Rate setters cited subdued growth and the slowest inflation in almost 40 years as driving rate cuts, while pointing to signs of stabilization in financial markets as creating room for further steps.

“Considering the outlook for inflation and the real economy and taking into account perceptions of the risks associated with the economy, further cautious easing of monetary conditions may follow,” policy makers said today.

Rate Guidance

The benchmark interest rate may fall to between 3 percent and 3.5 percent, central bank President Gyorgy Matolcsy said July 23. Forward-rate agreements indicate investors see it dropping to as low as 3.3 percent in the next three months.

Hungarian policy makers were split on how much to cut rates last month, with five Council members supporting the 20 basis-point reduction and two voting for a 10 basis-point cut, according to the minutes of the meeting, published Sept. 12.

U.S. central bankers surprised financial markets on Sept. 18 by refraining from dialing down bond buying that’s expanded the Fed’s balance sheet to a record $3.72 trillion. Beginning in May, policy makers including Chairman Ben S. Bernanke said they may start reducing quantitative easing this year.

“We only expect the central bank to veer” from its announced course if the Fed starts to “taper this year and this would cause bigger turbulence on the international markets and a more significant forint weakening,” Gergely Gabler, an economist at Equilor Befektetesi Zrt., said by e-mail.

Hungary’s central bank is complementing rate cuts with a Funding for Growth plan, with policy makers this month deciding to add 2 trillion forint ($9 billion) through 2014 to an initial 750 billion forint.

Ninety percent of the new funds -- which the central bank lends at zero interest to commercial lenders -- will be earmarked for new credit to small and medium-sized companies in a bid to boost economic growth.

To contact the reporters on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net; Zoltan Simon in Budapest at zsimon@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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