Hungary Inflation Slows to 7-Year Low as Rate Cuts Loom

Hungarian consumer prices rose at the slowest pace in almost seven years in February as the government cut household energy costs, making room for the central bank’s new management to lower interest rates further.

The inflation rate dropped to 2.8 percent from a year earlier, down from 3.7 percent the previous month, the Budapest-based statistics office said today. That compares with the 3.1 percent median estimate of 21 economists in a Bloomberg survey. Prices fell 0.1 percent from the previous month.

Prime Minister Viktor Orban’s government cut the costs of natural gas, electricity and heating by 10 percent in January, taming inflation and paving the way for further reductions in borrowing costs from the current 5.25 percent amid a deepening recession. Central bank President Gyorgy Matolcsy, Orban’s former economy minister, vowed to focus on growth and employment without threatening price stability when he took office last week.

“Our base case is for the central bank to proceed with gradual rate reductions of 25 basis points in the coming months,” Nora Szentivanyi, an economist at JPMorgan & Chase Co., said today in an e-mailed note. “However, the CPI undershoot could provide arguments for a 50 basis-point rate reduction this month and we expect this option to be discussed. We expect the easing cycle to continue in the second quarter.”

Forint Slumps

The forint declined to a nine-month low on concern Matolcsy is concentrating power to reshape monetary policy. The currency declined for a third day even after Economy Minister Mihaly Varga said yesterday the government is ready to stem the depreciation.

The currency slid 1.3 percent to 305.85 at 12:35 p.m. in Budapest, the weakest level since June 5. The cost of insuring Hungarian government debt against default for five years with credit-default swaps jumped 5 basis points to 325, the highest since Oct. 10, according to data compiled by Bloomberg.

Matolcsy stripped two of his deputies, Ferenc Karvalits and Julia Kiraly, appointed under a previous government, of some of their powers on March 8. He shifted responsibility to Adam Balog, a vice president appointed by Orban.

Speaking at a conference in Budapest today, the premier said the government and the central bank should embark on joint measures to unlock credit to businesses by reducing rates on corporate loans. Today’s figures showed Hungary reached the central bank’s inflation target, Orban said. The bank has maintained a goal of 3 percent since August 2005, according to its website.

‘Key Issue’

“Without trying to meddle in the central bank’s affairs, it’s a key issue for Hungary to have lower rates,” Orban said.

Orban moved Matolcsy to the central bank as he seeks to lift the economy from its second recession in four years before elections in 2014. Matolcsy, who has urged the Magyar Nemzeti Bank to embrace unconventional monetary tools to stimulate growth, engineered the government’s self-styled unorthodox policies, which contributed to the economic slump.

The measures included special levies on the banking, energy, retail and telecommunications industries, as well as the nationalization of private pension-fund assets to keep the budget shortfall below 3 percent of economic output to avoid losing European Union development funds.

Rate Record

Policy makers have reduced borrowing costs by 1.75 percentage points in the last seven months to a record-low 5.25 percent as the recession deepened. Gross domestic product shrank 2.7 percent from a year earlier in the fourth quarter, the steepest slump in three years, a report showed last week.

“The drop in inflation has already been enough to prove the central bank’s point that they have room to cut rates -- as if they needed any excuse,” Agata Urbanska, a London-based economist at HSBC Holdings Plc, said yesterday by phone. “I don’t see them stopping at 5.25 percent. But perhaps they’ll look at what else there is” to boost growth.

The central bank will cut the main rate by a quarter point to 5 percent on March 26, according to the median estimate in a Bloomberg survey of 12 economists. JPMorgan’s Szentivanyi forecasts the benchmark interest rate will fall to 4.5 percent later this year, with a weakening forint prompting policy makers to end the easing cycle at that level.

Electricity and gas companies are contesting in court the 10 percent price reduction imposed this year, citing their tax burden. The court ruled in favor of gas companies yesterday and a decision in the case filed by electricity providers is due next week.

Speaking yesterday in parliament, Orban called the court ruling “scandalous” and pledged to impose more price cuts.

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