Forint Dives to Nine-Month Low on Rates, EU Democracy Showdown

Hungary’s forint dropped to a nine-month low as falling inflation stoked prospects for interest-rate cuts and lawmakers backed constitutional changes some European Union members say undermine democracy.

The forint plunged the most among 31 major currencies after the statistics office in Budapest said today that price growth slowed more than analysts estimated to a seven-year low. Prime Minister Viktor Orban, whose lawmakers yesterday backed a constitutional amendment to limit judicial authority and this month brought in a new central bank leadership, today urged lower interest rates to boost the economy and called for Hungarians to own at least half the banking system.

“The market finally understood that we could be talking about a big risk, the total reshuffle of monetary policy,” Luis Costa, a strategist at Citigroup Inc., said by phone from London today. That could weaken “confidence in the central bank as an institution” focused on stabilizing inflation, he said.

The Hungarian currency depreciated 1.5 percent to 306.35 per euro by 5:32 p.m. in Budapest, extending its weakening this month to 3.6 percent. It depreciated 1.5 percent to 235.12 against the dollar. The yield on 10-year sovereign notes rose four basis points, or 0.04 percentage point, to a five-week high of 6.534 percent, according to data compiled by Bloomberg.

Hungary’s constitutional amendments “raise concerns with respect to the principle of the rule of law,” European Commission President Jose Barroso said in a joint statement from Brussels with Thorbjoern Jagland, secretary general of the Council of Europe yesterday.

German Relations

The legal changes “overshadow” Hungary’s relations with Germany and the EU, the German government said in a statement after Chancellor Angela Merkel met with Hungarian President Janos Ader in Berlin today.

Orban reiterated calls today to move at least 50 percent of Hungary’s banking system into Hungarian ownership and he mentioned plans to create a state-owned financial entity based on savings cooperatives which can boost lending.

Orban is “in effect threatening to nationalize part of the Hungarian banking sector,” Lars Christensen, a Copenhagen-based analyst at Danske Bank A/S, wrote in an e-mailed report.

The cost of insuring against default on Hungary’s debt with credit-default swaps rose 17 basis points to 338, the highest intraday level since Oct. 10.

“We find it difficult to see how the Hungarian government will fund itself on the international capital markets if the government and central bank do not move very soon to calm market fears,” Christensen wrote. “Unfortunately, we do not hold out much hope of this happening and the risk therefore continues to be skewed toward an even bigger forint sell-off.”

‘Forint Sell-Off’

The inflation data, combined with the country’s deepening recession, will probably prompt the National Bank of Hungary to cut its benchmark interest rate half a point to 4.75 percent on March 26, according to Tim Ash, a London-based chief economist at Standard Bank Group Ltd.

“I expect the NBH to surprise with more aggressive rate cuts now at the next monetary policy council meeting,” Ash wrote in an e-mail today. “If the forint further weakens, I think the NBH will intervene, selling foreign currencies.”

Economy Minister Mihaly Varga said yesterday the government regards the depreciation as temporary and is ready to use its clout if the weakness is sustained. Investors have been ditching the currency this month on concern central bank President Gyorgy Matolcsy is concentrating power to reshape monetary policy.

Currency ‘Captives’

The central bank will probably cut rates by 50 basis points in March, with an “outside chance” for 100 basis points, and reach 3.5 percent by the end of the year, London-based analysts at Royal Bank of Scotland Group Plc wrote in an e-mailed report today.

“Instead of opting for a gradual, smooth transition into the new role,” Matolcsy “prefers a grand entrance, in our view,” RBS analysts including Phoenix Kalen wrote in the note.

Orban said the country needs to fix its foreign currency loan “problem” to free up exchange rate policy. The cabinet, which has forced banks to take losses on foreign-currency mortgages of households, is working on a plan this year to help smaller companies convert their loans into forint, Orban said.

The government wants to weaken the forint to help boost exports, and seeks to convert foreign-currency loans into forint first to reduce risks from exchange rate swings, the RBS strategists wrote in a research report on March 7.

“It’s in vain to have our own currency” if Hungary can’t make use of its advantages because the foreign-currency loan burden means “we are captives to an exchange rate policy,” Orban said today.

The comments mean that “Orban backs the devaluation policy” for the forint, Peter Attard Montalto, a London-based strategist at Nomura Holdings Inc., said in an e-mail.

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