Hungary Set for Record Low Rates as Matolcsy Takes Over

Hungary’s central bank will probably lower its benchmark interest rate to a record low as investors focus on the possibility of new President Gyorgy Matolcsy deploying unconventional measures to end a recession.

The Magyar Nemzeti Bank will cut the two-week deposit rate by a quarter-point to 5 percent tomorrow, easing policy for an eighth month, according to 25 economists in a Bloomberg survey. Three expect a cut to 4.75 percent, while one predicts no change. The decision will be announced at 2 p.m. in Budapest and the Monetary Council statement will be published at 3 p.m.

Matolcsy scrapped the system of customary press briefings following rate decisions, central bank spokesman Andras Simon said in response to questions from Bloomberg. The governor will only hold media briefings after “strategically important” decisions, according to Simon.

The forint weakened as Matolcsy’s appointment sparked speculation over the direction of monetary policy, including the possible use of reserves for economic stimulus and to reduce the stock of foreign-currency loans. Investors are watching for indications of the governor’s self-styled unorthodox policies being introduced, according to Agata Urbanska, an economist at HSBC Bank Plc in London.

‘Uneasy’ Investors

Investors “are clearly uneasy,” Urbanska said by e-mail. “The story will not only be about the rate decision, but also the first communication from the governor on the policy outlook, the pace of changes or any new instruments.”

The forint dropped 4.2 percent against the euro in the past month, the most in the world, according to data compiled by Bloomberg. The currency traded at 306.65 per euro by 4:15 p.m. in Budapest, barely changed from the last trading day, after Cyprus agreed on the terms of a bailout to avert a default and an exit from the euro area.

Investors expect Hungary’s main rate to drop to at least 4.25 percent in the next six months, forward-rate agreements indicate.

“The market mistrust from mid-February has to do with the changing of the guard at the central bank,” Economy Minister Mihaly Varga said in a interview published today, in response to a question about the forint’s weakness.

The central bank will continue a “cautious” policy, new MNB Vice President Adam Balog told lawmakers today in Parliament, adding that the forint’s volatility wasn’t justified by Hungary’s economic fundamentals. Meeting the inflation goal is the priority of the new central bank leadership management, he said.

Matolcsy as economy minister called for the “brave” use of “unorthodox” monetary policy tools in December in a column in the weekly Heti Valasz, sending the forint to its weakest in seven months.

Supporting Policies

The central bank can support the government’s policies and boost the economy as long as it doesn’t jeopardize price and financial stability, Matolcsy said after his nomination on March 1. The bank should “review” buying government bonds on the secondary market, Varga said in the interview.

The Cabinet plans to use existing tools “for now” to help borrowers with foreign-currency mortgages, Varga said, according to financial news website. Hungarians borrowed predominantly in Swiss francs, taking advantage of lower interest rates. The weakening of the forint sent repayments soaring and boosted bad loans.

The government must solve the problem of foreign-currency loans for households and small businesses or risk remaining “captive of an exchange rate policy,” Prime Minister Viktor Orban said March 12.

Matolcsy’s Policies

As economy minister, Matolcsy nationalized private pension fund assets and levied retroactive industry taxes, damaging investments, lending and growth and losing Hungary’s investment grade.

Matolcsy this month consolidated his power as central bank chief, stripping previously appointed vice presidents of their strategic responsibilities. He also demoted or fired 12 “mostly” senior-level employees, including economists who had served at the bank for more than a decade, Origo news website reported March 21.

Days before taking over the bank, Matolcsy called a central bank report “immoral” and “unethical,” raising concern about the independence of the institution under his leadership.

Standard & Poor’s cited the weakening of Hungary’s “policy framework” and “questions about the independence of oversight institutions and hence their credibility” in reducing the country’s credit outlook to negative from stable on March 21. Hungary is rated BB, the second-highest non-investment grade at S&P, on par with Portugal and Guatemala.

‘Institutional Risk’

“Previous downgrades used to be generated by erratic fiscal policy and acute growth underperformance,” Luis Costa, a London-based strategist at Citigroup Inc., said in a March 22 e-mail. “For the first time in a while rating agencies mention institutional risk as one major variable in measuring Hungary’s creditworthiness. I consider this change of outlook as the opening of one more important dimension in Hungarian risk.”

Policy makers delivered seven consecutive rate cuts since August, with ruling party-delegated Monetary Council members outvoting previous Governor Andras Simor and his two deputies each time by a margin of four to three.

Since Matolcsy’s appointment, the Monetary Council was expanded by two members to nine, with Gyula Pleschinger, who was the new central bank chief’s deputy at the Economy Ministry and Balog, a former deputy state secretary for tax issues in Matolcsy’s ministry. Of the previous leadership, Ferenc Karvalits’s mandate expires after this month’s rate meeting.

Inflation Slows

The central bank may have more room to cut rates after consumer prices rose at the slowest pace in almost seven years in February as the government cut household energy costs. The inflation rate dropped to 2.8 percent from a year earlier, below the bank’s 3 percent target, and down from 3.7 percent in January.

Hungary’s central bank is also scheduled to publish its inflation report on March 26. Previously, the bank published its gross domestic product and inflation forecasts an hour after the rate decision. The bank didn’t answer an e-mail from Bloomberg News seeking confirmation whether it would continue the practice.

Before it's here, it's on the Bloomberg Terminal.