Hungarian Central Bank Flags More Easing After Holding Key Rate

  • Policy makers closely monitoring ECB's March decision
  • Investors pricing in rate cuts despite central bank's guidance

The Hungarian central bank may ease monetary conditions further as they seek to combat below-forecast inflation and limit an economic slowdown, policy makers said, after leaving the benchmark interest rate unchanged for a seventh month.

Rate-setters left the main rate unchanged at a record-low 1.35 percent on Tuesday, matching the forecasts of all 17 economists in a Bloomberg survey. Policy makers may ease monetary conditions further considering what they see in the March inflation report, the bank said in a statement.

The Monetary Policy Council “is closely examining developments in the foreign monetary environment, particularly the measures of the European Central Bank,” to ensure monetary conditions are adequate to meet the inflation target, the bank said after the decision.

Policy makers are holding back from rate cuts even as investors price in further reductions in the benchmark. Vice Governor Marton Nagy said Jan. 29 that the regulator won’t cut its main rate and would instead focus on overnight loans and deposits as an outlet for possible monetary easing.

FRAs, Forint

Derivatives contracts show investors are unconvinced by the monetary authority’s rate forecast. Forward-rate agreements used to wager on borrowing costs in six months showed bets for 15 basis points in reductions to the benchmark rate, the most in three weeks. The forint has gained 2.7 percent against the euro this year, the fourth-best performance globally.

The central bank “may consider resuming interest rate cuts in May or June the earliest,” provided the European Central Bank trims borrowing costs in March and the next Fed rate increase is delayed, Gergely Urmossy, an economist at Erste Group Bank AG’s local unit, said in an e-mailed note.

The dilemma facing Hungary is shared by nearby Poland, whose benchmark rate has remained at a record low since last March. Derivatives traders are betting on a quarter-point of easing by the National Bank of Poland in the next six months as inflation undershoots its forecasts. Failure to gauge price movements prompted an apology from Governor Marek Belka earlier this month.

Unconventional Arsenal

The central bank has complemented a program of free funding to lenders with new offers and regulations. That includes three-year interest-rate swaps, where the regulator takes on part of the credit risk if banks boost borrowing in return. It’s also trying to channel lenders’ deposits at the central bank into sovereign bonds to cut government borrowing costs as another part of its unconventional-policy arsenal.

If central bankers agree that further easing is necessary, the regulator will next hone in on its interest-rate corridor, Nagy said on Jan. 29. The monetary authority may make a decision on the corridor in March or April, after evaluating liquidity flows during the phasing out of its two-week deposit facility, its former benchmark instrument.

Policy makers already lowered the interest rate offered on overnight deposits and charged on loans in September by 25 basis points to 0.1 percent and 2.1 percent, respectively, as they sought to increase the cost of parking excess liquidity at the central bank compared with buying government bills.

Consumer prices rose 0.9 percent in January from a year earlier, unchanged from December. The central bank forecast in December that inflation will accelerate to an average of 1.7 percent this year from 0.1 percent in 2015. That compares with its 3 percent medium-term target.

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