• Bank is weighing need for more cuts, Vice Governor Nagy says
  • Policy makers aim for interest-rate stability, Nagy says

Hungary’s central bank is seeking to rein in what it says are excessive rate-cut expectations, according to Vice Governor Marton Nagy, who ruled out an exchange-rate cap similar to the Czech Republic’s.

The National Bank of Hungary wants to lower its benchmark interest rate to the “lowest level that’s still sustainable over the monetary-policy horizon,” Nagy told reporters in Budapest on Thursday. Policy makers want to avoid rate volatility, he said.

The central bank said only a “slight” rate-cut scope remained after it lowered the benchmark to a record 1.05 percent from 1.2 percent this week, the second consecutive 15-basis point reduction. Policy makers in March abandoned a vow to leave borrowing costs unchanged through the end of 2017 to combat subdued inflation and to prevent the European Central Bank’s new stimulus driving up the forint.

“The main question is whether there will be a third rate cut” in May “or even a fourth one” in June, Nagy said. “We don’t want to follow the market, we want to lead it and that’s why we wanted to rein in” speculation over the extent of monetary easing, he said.

Forint Strength

The forint strengthened 0.1 percent to 311.13 per euro as of 10:24 a.m. in Budapest. It’s gained 1.6 percent this year, compared with a 2.9 percent decline in the Polish zloty and a 1.2 percent advance by the Romanian leu.

Forward-rate agreements, used to wager on future interest rates, show bets for 24 basis points in cuts over the next three months. Derivatives traders have kept estimates largely unchanged in the past three weeks, pegging the main rate to fall to about 0.8 percent

Hungary “excludes” the introduction of a currency cap akin to the Czech central bank’s practice to stem the koruna’s appreciation. Policy makers in Budapest are aiming for stability in both interest rates and in the exchange rate, Nagy said.

Hungary’s benchmark rate is the region’s lowest after the Czech Republic’s, whose central has held its key rate at a “technical zero” of 0.05 percent for about 3 1/2 years. Poland has left its main rate at 1.5 percent for the past year, while Romania’s has been at 1.75 percent for seven months.

No Cap

“We really don’t like” the Czech method, Nagy said. “We won’t allow the market to push us into an exchange-rate cap model.”

Consumer prices fell for the first time in six months in March from a year ago, moving more distant from the central bank’s 3 percent inflation rate target.

Prime Minister Viktor Orban’s cabinet, sliding in opinion polls, is preparing cuts in the value-added tax rate for some food staples, Internet and restaurant services in 2017. The cabinet forecasts an average inflation rate of 0.9 percent in 2017, compared with the central bank’s 2.4 percent estimate, published before the tax plans were announced.

The VAT cut’s impact on inflation may be more limited as wage growth is accelerating, raising inflationary pressure to the point where “we can’t ignore it,” Nagy said. The government’s 2017 budget forecasts the deficit widening to 2.4 percent of gross domestic product from an estimated 2 percent this year, partly due to pre-election spending on state salaries. The next parliamentary ballot is scheduled for the spring of 2018.

Budget Effect

Looser fiscal policy may allow the central bank to limit further monetary easing, Nagy said. The bank is phasing out interest-rate swaps offered to commercial lenders to push their liquidity into government bonds, which has cut borrowing costs. Mandatory pricing on the interbank forint market will be introduced on May 2 and mandatory volumes may also be considered if rates don’t begin to diverge from the benchmark.

Policy makers are ready for more unconventional policies after the end of the rate-cut cycle if such moves become necessary, Nagy said.

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