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Hungary Cuts Main Rate to Record 3.4%, Matching Forecasts

Hungary’s central bank cut its benchmark interest rate to a record and said the outlook for inflation and economic growth justifies further easing.

The Magyar Nemzeti Bank cut the two-week deposit rate to 3.4 percent from 3.6 percent at a meeting today, matching the forecasts of 21 of 22 economists in a Bloomberg survey.

“Further cautious easing of monetary conditions may follow,” the rate-setting Monetary Council said in a statement.

Policy makers have lowered borrowing costs for 15 straight months, slashing the benchmark by more than half to buoy recovery from a recession last year. To help tame prices, the government has imposed a one-fifth reduction in utility costs in 2013. The U.S. Federal Reserve’s decision to maintain its stimulus program has eased market volatility, the Hungarian central bank said.

The forint, which has gained 1.5 percent in the past month, the best performance among 24 emerging-market currencies tracked by Bloomberg, traded at 293.73 per euro as of 3:20 p.m. in Budapest. The yield on the benchmark government bond due 2023 dropped to 5.35 percent from 5.9 percent a month ago.

Emerging-market assets have rallied after the U.S. central bank maintained its $85 billion of monthly bond purchases in September. Following a partial U.S. government shutdown this month, the Fed will delay tapering its stimulus until March, according to an Oct. 17-18 survey of economists by Bloomberg.

Easing Room

Rate-setters today cited subdued economic growth and the slowest inflation in almost 40 years as driving rate cuts.

“Low CPI pressure and delayed Fed tapering created room for further easing,” Orsolya Nyeste and Gergely Gabler, Budapest-based economists at Erste Group Bank AG, said by e-mail. They forecast the main rate at 3 percent by year-end.

Forward-rate agreements used to wager on three-month Hungarian interest rates in three months rose 2 basis points to 3.12 percent. That compares with the 3.54 percent Budapest interbank offered rate, indicating bets for about 40 basis points of rate cuts in the next three months.

Eastern European central banks are diverging as their economies show varying degrees of health. Poland left borrowing costs at a record low for a second meeting this month as policy makers assess recovery from a slowdown, while Romania cut its benchmark for a third month on Sept. 30 to bolster growth.

Growth, Inflation

“There remains a significant degree of unused capacity in the economy and inflationary pressures are likely to remain moderate over a sustained period,” the Monetary Council said.

Gross domestic product rose 0.1 percent from the previous three months in the second quarter after a 0.6 percent advance in the January-March period.

In addition to rate cuts, the central bank is providing 2.75 trillion forint ($13 billion) of interest-free funds to commercial lenders to boost credit to small and medium-size companies. The government forecasts 2 percent growth in 2014.

The inflation rate, which increased to 1.4 percent in September from 1.3 percent the previous month, has remained below the central bank’s 3 percent medium-term target since February.

Price pressure eased after the government, which faces elections in 2014, ordered an 11.1 percent cut in utility charges starting next month, adding to a 10 percent reduction at the start of this year. At the same time, the core inflation rate, which strips out volatile food and energy price swings, rose to 3.5 percent from 3 percent in August.

Shifting Perceptions

A “sustained and marked shift” in investors’ risk perceptions of Hungary may affect the central bank’s room for for policy maneuver, the monetary authority said today.

A recovering economy, rising core inflation and investor concern for how Prime Minister Viktor Orban wants to phase out billion of dollars in household foreign-currency mortgages may mean the central bank is nearing the end of its rate-cut cycle, Capital Economics Ltd. said in an e-mail.

The government plans to unveil its mortgage plan by early November after rejecting proposals by lenders. The country’s banks lost $1.7 billion during a 2011 program and reacted by pulling out capital equal to 23 percent of GDP and cutting new lending.

“A repeat of these events would bring the current easing cycle to a halt, if not into reverse,” said William Jackson, a London-based economist at Capital Economics. “For now though, assuming that the banks and government can reach some form of agreement, and the euro zone avoids a fresh crisis, we expect two more 20 basis-point interest-rate cuts this year.”

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