Hungary Flags More Easing After Main Rate Cut to Record Low
Hungary’s central bank cut its benchmark interest rate to a record low and signaled that further monetary easing is possible after the inflation rate fell below 1 percent.
The Magyar Nemzeti Bank reduced the two-week deposit rate to 3.2 percent from 3.4 percent, it said today. That matched the forecast of 21 of 22 economists in a Bloomberg survey. One predicted a cut to 3 percent. The outlook for inflation and economic growth allows further “cautious” rate cuts, the Monetary Council said in a statement.
Policy makers have lowered borrowing costs for 16 consecutive months to help the recovery from a recession last year. Price growth is slowing on the back of government-mandated cuts in utility costs, while the European Central Bank’s easing also gives emerging-market rate setters room to maneuver.
“The recent sharp fall in inflation, coupled with the surprise decision by the ECB to loosen monetary policy earlier this month, has raised the prospect of a modest loosening of monetary policy in 2014 as well,” William Jackson, a London-based economist at Capital Economics Ltd., said in an e-mail today.
The forint has weakened 2.1 percent against the euro in the past month, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg behind the Czech koruna, the Indonesian rupiah and the Brazilian real. It traded 0.6 percent weaker at 298.60 per euro at 3:13 p.m. in Budapest. The yield on the benchmark 10-year government bond fell to 5.98 percent from 6 percent yesterday.
Forward-rate agreements used to wager on three-month interest rates in three months fell three basis points to 2.93 percent. That compares with the 3.34 percent Budapest interbank offered rate.
The monetary easing is a “serious upside risk” to a forint-rate forecast of 285 per euro at the end of next year by Concorde Securities, Janos Samu, an analyst at the Budapest-based brokerage, said by e-mail.
“A bias of monetary policy towards tolerating financial-stability and inflation risks in favor of growth prospects reduces the likelihood that the MNB can respond in a timely and adequate manner to financial-market volatility,” Samu said today.
Eastern European central banks are diverging as their economies show varying degrees of health. Poland left borrowing costs at a record low for a third meeting this month to help spur a quicker recovery, while Romania cut its benchmark for a fourth month on Nov. 5 on slowing inflation. Russia’s central bank refrained from easing policy this month, leaving the one-week auction rate at 5.5 percent.
The ECB delivered a surprise interest rate cut to 0.25 percent this month with President Mario Draghi arguing Europe needs record-low borrowing costs to combat a “prolonged” period of weak inflation and “very high” unemployment. ECB Governing Council member Ardo Hansson said Nov. 22 that the central bank’s rate-cut options aren’t yet fully exhausted.
Emerging-market countries are benefiting from the U.S. Federal Reserve’s decision to maintain its $85 billion monthly bond-buying program. A reduction in the stimulus may prompt investors to pull back from riskier assets.
The Hungarian central bank’s policy is “in line with global monetary policy,” Tamas Pesuth, an analyst at Nezopont research institute in Budapest, said in an e-mail. Pesuth predicts the benchmark rate falling to 3 percent next month, possibly followed by slower reductions if rate setters decide to cut further.
Hungary will mark the end of the easing cycle with one more 20 basis point cut in December, according to Jackson at Capital Economics. Raiffeisen International Bank (RBI) AG’s local unit predicts the benchmark will fall below 3 percent, with steps of 10 basis points from that level, Chief Economist Zoltan Torok said by phone.
Hungary last week raised $2 billion in its second dollar bond sale this year. The 10-year notes were priced to yield 325 basis points above similar-maturity Treasuries.
Policy makers in Budapest were split last month on how much to trim interest rates, with eight Council members supporting the 20 basis-point reduction and one voting for a 10 basis-point cut, according to the minutes of the meeting, published Nov. 13.
“Tensions within the central bank are only beginning to surface as the debate intensifies regarding the equilibrium level of interest rates appropriate for a small open economy such as Hungary,” economists led by Benoit Anne at Societe Generale SA (GLE) in London said in an e-mail yesterday. “Momentum for further easing remains strong, fueled by political pressure.”
Gross domestic product rose 0.8 percent from the previous three months in the third quarter after a 0.4 percent quarterly advance in the April-June period. The inflation rate dropped to 0.9 in October from 1.4 a month earlier, remaining below the central bank’s 3 percent medium-term target since February.
The government, which faces elections in 2014, ordered an 11.1 percent cut in utility charges starting Nov. 1, adding to a 10 percent reduction at the start of this year.
In addition to rate cuts, the central bank is providing 2.75 trillion forint ($13 billion) of interest-free funds to commercial lenders to boost credit to small and medium-sized companies.
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