• Policy makers undecided on how long or how deep cycle will go
  • Regulator aims to keep rate at bottom for `sustained' period

Hungary’s central bank, which surprised investors by bringing forward the start of a rate-cut cycle, may maintain the pace of monetary easing and will aim to keep borrowing costs steady for a “sustained” period once the bottom is reached, Vice Governor Marton Nagy said.

“We’re aiming for a benchmark interest-rate level that we can maintain for a sustained period, where we can avoid having to raise it ahead of time,” Nagy told reporters in Budapest on Wednesday, a day after policy makers cut the three-month deposit rate to 1.2 percent from 1.35 percent, the first reduction in eight months.

Policy makers may proceed in 15 basis-point steps, but are “undecided” on how long the rate-cut cycle may last or where its nadir may be, Nagy said. He said the monetary authority will use a combination of conventional and non-conventional tools to achieve its inflation target of 3 percent, which it now forecasts to be no earlier than the first half of 2018.

Under pressure to boost price-growth and with investors stepping up bets for easing, central bankers in Budapest abandoned their vow to keep rates unchanged through the end of next year. Their move was also hastened by the European Central Bank’s new monetary stimulus this month, which raised the prospects of the country’s assets attracting inflows that would further strengthen the Hungarian currency and drive prices even lower.

Forint Drops

The forint weakened 0.3 percent to 312.69 per euro by 10:11 a.m. in Budapest, taking its two-day decline to 0.6 percent, the biggest drop among 24 emerging-market currencies tracked by Bloomberg. The forint may weaken “modestly” to 320 per euro this year, Pasquale Diana, an economist at Morgan Stanley in London, said in an e-mailed report. The 10-year government bond yield fell below 3 percent for the first time this year.

Central bankers only recently signaled a willingness to cut rates. In January, Nagy explicitly ruled out lowering the benchmark, only to say last month that policy makers would consider a reduction no earlier than May while they adjusted the so-called interest-rate corridor.

“We meant to surprise at the start of the rate-cut cycle,” Nagy said. “Everything had pointed to the need for monetary easing, the question was only what tool to deploy.”

Unconventional Easing

The regulator also cut its one-week loan rate spread to 15 basis points above the benchmark from 25 basis points, Nagy said. The excess reserve rate was lowered to minus 0.05 percent from zero, effective April 7, he said.

On Tuesday, rate-setters reduced the overnight collateralized loan spread by half a percentage point to 0.25 percent while the overnight deposit rate also fell to minus 0.05 percent after the benchmark cut, below zero for the first time. Central bankers are “unlikely” to change the collateralized loan spread in the future, though they may adjust the overnight deposit rate spread from the current 1.25 percentage points to avoid pushing the rate too deep into negative territory, Nagy said.

“If the benchmark rate falls further, how low the bottom of the corridor can go becomes a question,” he said. “I don’t believe in reducing it without restraint, because the negative rate becomes hugely punishing beyond a certain level.”

To further ease monetary conditions, the central bank will also introduce mandatory pricing for the one-month and three-month Budapest inter-bank rate, known as the BUBOR and used to price loans across the economy, which until now has been effectively pegged to the benchmark rate.

Rate Outlook

Tuesday’s decision to cut the benchmark showed that Hungary’s central bankers returned to conventional monetary easing, Nagy said.

Morgan Stanley’s Diana said there’s a risk the rate will drop below his forecast of 1 percent. Erste Group Bank AG predicted 0.75 percent as the bottom, while for JPMorgan Chase & Co. said it may be “0.5 percent or lower.”

Tuesday’s move was “the first cut in a new rate-cutting cycle, likely to last at least four or five months,” Nicolaie Alexandru Chidesciuc, a JPMorgan economist in London, said in e-mail on Wednesday. “It is not clear to us what magnitude of rate cuts is needed in order to reach the inflation target of 3 percent, but it now looks to us like the” central bank “is aiming to sharply lower the policy rate.”

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