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Hungary Slows Pace of Rate Cuts on Fed Stimulus Retreat

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The Magyar Nemzeti Bank stands in Budapest
The Magyar Nemzeti Bank lowered the two-week deposit rate to a record 2.85 percent from 3 percent, matching the forecast of five of 24 economists in a Bloomberg survey. Photographer: Akos Stiller/Bloomberg

Jan. 21 (Bloomberg) -- Hungary’s central bank slowed the pace of interest-rate cuts after the U.S. Federal Reserve curbed its monetary stimulus, while policy makers indicated the potential for further easing.

The Magyar Nemzeti Bank today lowered the two-week deposit rate to a record 2.85 percent from 3 percent, matching the forecast of five of 24 economists in a Bloomberg survey. Fourteen predicted a 10 basis-point cut and five saw rates declining by 20 basis points. Policy makers opted for a smaller reduction following steps of 20 basis points because of “uncertainty related to the global financial environment,” they said in a statement.

Rate setters, who are trimming borrowing costs to buoy the economy, said last month they’ll probably slow the pace of easing after cutting rates by 400 basis points in 17 consecutive meetings. The outlook for inflation and economic growth allow “for further cautious easing of monetary policy,” the rate-setting Monetary Council said in its statement.

“The central bank wanted to lower the pace of easing in the post-tapering world, but given that market conditions have held up relatively well they didn’t feel the need to reduce the pace to 10 basis points,” Abbas Ameli-Renani, an economist at Royal Bank of Scotland Group Plc in London, wrote in an e-mail.

The forint weakened 0.2 percent to 302.48 per euro as of 3:15 p.m. in Budapest. It has lost 1.7 percent against the euro this month, the third-weakest performance among 24 emerging-market currencies Bloomberg tracks. The yield on benchmark 10-year government debt has fallen to 5.460 percent from 5.927 percent.

Fed Taper

The Fed said Dec. 18 that it would cut its monthly bond-buying program to $75 billion from $85 billion, raising the risk that investors may pull out of riskier emerging markets.

Eastern European central banks are weighing the Fed’s move against the need to boost economic activity. Romania lowered its benchmark rate to a record 3.75 percent on Jan. 8, while Poland and Russia both left borrowing costs unchanged this month. The Fed’s decision “doesn’t limit Hungary’s rate-cut scope,” central bank Deputy Governor Adam Balog said Jan. 15.

Forward-rate agreements used to wager on three-month interest rates in three months were steady at 2.72 percent, compared with the 2.97 percent Budapest Interbank Offered Rate.

Policy makers were split last month on how much to trim interest rates, with seven supporting the 20 basis-point reduction and two voting for a 10-point cut, according to the minutes of the meeting published Jan. 8.

Inflation Curb

To help the economy continue its recovery from a 2012 recession, Hungary is seeking to stem price growth by imposing tariff cuts on utilities companies. The government, which faces elections on April 6, is considering a third round of price reductions for households after slashing costs by 20 percent in two previous steps, Prime Minister Viktor Orban said Dec. 13.

Consumer prices rose 0.4 percent from a year earlier in December, the slowest pace since March 1970, after a 0.9 percent increase in November. The inflation rate has fallen short of the central bank’s 3 percent medium-term target since February.

A new round of household tariff cuts would keep inflation at less than 2 percent for most of 2014 and prompt rate-setters to extend the easing cycle, according to JPMorgan Chase & Co.

“Under a scenario of a 10 percent cut in energy prices, we think the central bank could cut the policy rate as low as 2 percent this year,” London-based economists at JPMorgan said by e-mail before today’s decision.

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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