Hungary Nears End of Rate-Cut Cycle as Risks Mount, Palotai Says

Hungary’s central bank, which cut borrowing costs to a record this week, is nearing the end of its easing cycle as risks mount, including from expected monetary tightening in the U.S., according to an executive at the bank.

Two of the risk scenarios considered by rate-setters point in the direction of tighter monetary conditions, with one suggesting the need for looser policy, National Bank of Hungary Executive Director Daniel Palotai said on Thursday in Budapest.

“The balance of the scenarios compared to the baseline has changed from earlier and it suggests that the bottom of the easing cycle may be near,” Palotai told reporters. There’s no guidance on the size of any future rate cuts, he said.

Hungarian rate-setters on June 23 cut the benchmark rate to a record 1.5 percent from 1.65 percent, the fourth month of 15 basis-point reductions. The inflation outlook allows for “further, slight easing,” policy makers said. That guidance contrasted with those of peers, such as in Poland and Romania, which wrapped up rate cuts ahead of the expected start of the U.S. Federal Reserve’s monetary-tightening cycle.

The forint weakened 0.5 percent to 312.62 per euro at 11:43 a.m. in Budapest. The currency has dropped more than 2.9 percent since the central bank restarted its rate-cutting cycle on March 24, the biggest decline among its peers in the European Union’s non-euro eastern members.

Risks Mount

The rise in yields in developed markets, partly driven by rate increase expectations in the U.S., may drive up risk premiums in emerging markets and require tighter monetary conditions, the central bank said in its Inflation Report published on Thursday.

An escalation in the Russia-Ukraine conflict may also force central bankers to tighten monetary conditions, according to the report. Persistently low commodity prices would allow for looser monetary conditions, the bank said.

Hungarian consumer prices rose for the first time in nine months in May. The inflation rate was 0.5 percent compared with a year earlier.

The central bank raised its 2015 average inflation forecast to 0.3 percent from zero and cut the 2016 projection to 2.4 percent from 2.6 percent. The central bank forecasts the inflation rate approaching policy makers’ 3 percent target at the end of the monetary horizon in 2017.

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