Forint Snaps Longest Losing Streak in 8 Months on Policy Tools

The forint halted its longest losing streak in eight months and Hungary’s yields fell to a 2 1/2-year low as the central bank cut interest rates for a sixth month and cautioned on the use of new unconventional policy measures.

The currency appreciated 0.9 percent to 295.7 per euro by 5:27 p.m. in Budapest, the steepest rally since Jan. 17. It weakened for a fifth day yesterday, the longest stretch of losses since May 18. Yields on the government’s three-year bonds dropped nine basis points, or 0.09 percentage point, to 5.48 percent, the lowest level since May 2010.

Hungary’s central bankers, who cut the main rate to 5.5 percent from 5.75 percent, said that expanding the bank’s policy toolkit is only useful in “acute” turmoil, according to a statement. The forint dropped 2.8 percent through yesterday after Economy Minister Gyorgy Matolcsy said last month that the next governor, who takes over in March, should “bravely use unorthodox tools” to help the economy recover from its second recession in four years.

“With this reference, the Monetary Council created a policy anchor, aiming at reducing the perceived risks of succession,” Gabor Ambrus, a London-based economist at 4Cast Ltd., wrote in an e-mailed report today.

Matolcsy is the most likely successor to Andras Simor, whose term as central bank president expires in March, according to the Index and news websites.

Today’s rate cut, which brought the benchmark rate to the lowest level since 2010, matched the forecast of 27 out of 28 economists in a Bloomberg survey. Sandor Jobbagy, an analyst at Intesa Sanpaolo SpA’s CIB unit, forecast no change.

Fiscal Consolidation

Hungary should use further monetary easing “very cautiously,” the International Monetary Fund said in a statement yesterday after a regular review of the country’s economy. Hungary will probably overshoot its budget deficit targets through 2015 and needs a shift in policy to make fiscal consolidation sustainable and to boost growth, the IMF said.

Four policy makers appointed by lawmakers of Prime Minister Viktor Orban’s Fidesz party have outvoted Simor and his two deputies at each rate meeting from August through December. Today’s vote was also “tight,” Simor said, without giving an exact breakdown.

“We are penciling in one more rate cut over the near term,” Annika Lindblad, a Helsinki-based analyst at Nordea Bank AB, said in an e-mailed note today.

Forward-rate agreements predicting borrowing costs in nine months fell four basis points to 4.69 percent, 101 basis points below the Budapest interbank offered rate to which it settles. The spread has narrowed from a three-year high of 1.39 percentage points reached in December.

“The Monetary Council is very likely going to proceed with the recent practice of cutting the base rate,” Janos Samu, a Budapest-based economist at broker Concorde Ertekpapirt Zrt., wrote in a research report today. “We lower our year-end forecast of 5.5 percent to 5 percent seeing the determination of the Monetary Council to cling to the easing cycle.”

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