Hungary Ends Interest-Rate Cuts After Five Months of Easing

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Hungary’s central bank announced an end to its rate-cut cycle after five months of reductions, which took the benchmark to the second-lowest in eastern Europe.

The National Bank of Hungary will keep its benchmark at 1.35 percent “for a very long time,” President Gyorgy Matolcsy told reporters in Budapest on Tuesday. The central bank cut the rate by 15 basis points, or 0.15 percentage point, earlier in the day, more than the 10 basis-point forecast by the majority of analysts in a Bloomberg survey.

Policy makers have taken the main rate to its record low from 7 percent in the past three years, with a pause between July last year and March. The monetary authority, which had continued easing after eastern European countries including Poland and Romania ended reductions, cited worsening investor sentiment in its statement explaining the decision.

“We stopped here as this level is closest to an equilibrium rate,” Matolcsy said. “We think we were able to create one of the most favorable business environments of Hungarian economic history with these two rate-cut cycles.”

The forint strengthened as much as 1 percent against the euro to 307.01, its strongest since May 25, and traded at 307.77 as of 3:33 p.m. in Budapest, according to data compiled by Bloomberg. The yield on Hungary’s three-year government bonds rose five basis points to 2.19 percent.

Faster Inflation

Hungarian rate setters earlier cited moderate inflation, the desire to lower sovereign-debt financing costs and the need to boost economic growth for continuing with cuts. June inflation was 0.6 percent from a year earlier, the fastest since 2013, though still short of the central bank’s 3 percent medium target.

“The two most recent inflation prints have been positive, which seems to have been enough to convince the central bank to end its easing cycle,” Anders Svendsen, an analyst at Nordea Bank A/S in Copenhagen, wrote in an e-mailed report.

Tuesday’s cut took the benchmark interest rate below that of higher-rated Poland, which is at 1.5 percent.

Even as the U.S. Federal Reserve starts tightening, its pledge to keep monetary policy “loose” for an extended period will help Hungary maintain its benchmark over the longer term, Matolcsy said.

Hungary’s rate may stay on hold for as long as a year because loose monetary conditions in the euro area, the country’s main trading partner, outweigh potential Fed tightening, said Andras Balatoni, a Budapest-based economist at ING Groep NV.

Tightening may happen “sometime in the middle of next year to keep the credibility of the inflation target,” Balatoni said.

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