Hungary Rate Cut Outlook Extends Bond Rally: Budapest Mover

Yields on short-term Hungarian government bonds fell on mounting speculation the central bank will keep cutting interest rates to counter recession.

Yields on forint-denominated notes due February 2017 fell two basis points, or 0.02 percentage point, to 5.45 percent by 5:32 p.m. in Budapest, the lowest in almost three years, according to generic indexes compiled by Bloomberg. The forint was little changed at 291.25 against the euro.

Extra liquidity from the European Central Bank is pushing investors into higher-yielding forint bonds while money-market traders have increased bets on monetary easing in Hungary since data last week showed the economic contraction intensified in the fourth quarter and inflation slowed in January. Short-term price pressure may “significantly” ease, Vice-Governor Ferenc Karvalits was quoted as saying by Dow Jones Newswires today.

“Further rate cuts are justified,” Zsolt Kondrat, an analyst at Bayerische Landesbank’s Budapest-based MKB unit, said by phone today. “I expect plenty of liquidity and don’t foresee a big deterioration in sentiment. That means the forint might stay relatively stable and rate cuts can continue.”

The benchmark rate will probably be reduced to 4.5 percent by the end of June from 5.5 percent now, Kondrat said.

The Magyar Nemzeti Bank, which has lowered the main rate by a cumulative 1.5 percentage points since August to a two-year low, will deliver a 25 basis-point cut on Feb. 26, according to all 10 economists surveyed by Bloomberg.

Policy makers will keep cutting the rate in quarter-point steps to 4 percent, Daniel Hewitt, a London-based senior economist for emerging markets at Barclays Plc, wrote in a report to clients yesterday.

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