Hungary Raises Rate-Cut Threshold in Matolcsy Surprise

Hungary’s central bank tightened the conditions for monetary easing after it cut borrowing costs to a record low in the first decision since Gyorgy Matolcsy took charge of rate policy. The forint strengthened.

The Magyar Nemzeti Bank reduced the two-week deposit rate by a quarter-point to 5 percent, cutting it for an eighth month and matching the forecast of 25 of 29 economists in a Bloomberg survey. Easing can only continue if uncertainty in the market environment abates, policy makers said in a statement.

“They’ve become more cautious and this is a positive surprise,” Eszter Gargyan, a Budapest-based economist at Citigroup Inc., said by e-mail.

Hungary’s currency had weakened as Matolcsy’s appointment sparked speculation over the direction of monetary policy, including the possible use of reserves to stimulate the economy and reduce foreign-currency loans. The country is in its second recession in four years and the central bank today said the inflation rate is headed below its 3 percent target “throughout” the horizon for monetary policy.

The forint jumped the most in more than a week, rising 0.9 percent against the euro to 303.43 by 4:02 p.m. in Budapest. That pared its loss to 2.7 percent in the past month, still the worst among more than 20 emerging-market currencies tracked by Bloomberg after the South African rand.

Changed Statement

Today’s comment from the central bank was a departure from last month, when policy makers said inflation in line with the 3 percent target and continuing “favorable market trends” are needed for further monetary easing.

Still, investors stepped up expectations for further rate cuts after today’s decision. The main rate may drop to 4 percent in the next six months, forward-rate agreements indicate.

“There may be a one or two more rate cuts, but I think the central bank wanted to start preparing the market for the end of the easing cycle,” Istvan Horvath, who helps manage $3.5 billion at the Budapest investment management unit of KBC Groep NV, said by phone today.

Today’s decision was “the only good choice” as a bigger cut would’ve suggested “recklessness” with the forint above 300 per euro, while leaving borrowing costs unchanged would’ve suggested that the bank doesn’t want to breach a certain exchange-rate target, which would’ve led to the market testing that level, Horvath said.

Inflation Forecast

The central bank today cut its inflation forecast for this year while maintaining its economic-growth estimate. Inflation will be 2.6 percent, rather than the 3.5 percent forecast in December, with gross domestic product expanding 0.5 percent, it said.

Consumer prices may rise 2.8 percent next year, while growth may be 1.7 percent in 2014, it said.

Inflation was the slowest in almost seven years in February as the government cut household energy costs. The 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. The bank will publish its full quarterly inflation report on March 28.

Investors were also watching for indications of Matolcsy’s self-styled unorthodox policies being introduced. There was no mention of unconventional tools in the statement.

‘Unorthodox’ 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 credit rating.

Before his appointment, Matolcsy 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.

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, Economy Minister Mihaly Varga said in a interview published yesterday.

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 tomorrow.

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