Hungary Rate Cuts Hinge on Risk Amid Price Turnaround, MNB Says

Hungarian monetary easing hinges on “benign” market conditions as inflation is poised to decelerate further below target, the central bank said.

Recent data show a “turning point” in inflation, which will slow further in the near term, according to the minutes of the March 26 policy meeting, where policy makers voted seven to two to cut the main rate to a record-low 5 percent.

“Members agreed that the council would only consider a further reduction in the policy rate if medium-term inflationary pressures remained moderate and the uncertainty surrounding financial-market developments diminished,” according to the minutes, which were posted on the bank’s website today.

The Magyar Nemzeti Bank reduced the two-week deposit rate for an eighth month in March as policy makers seek to lead the economy out of recession. New central bank Governor Gyorgy Matolcsy announced a set of measures last week aimed at offering preferential loans to small businesses to boost investment and refinance foreign-currency debt. The bank plans to use a tenth of the nation’s foreign-currency reserves to fund the plan.

The forint fell 0.3 percent to 298.10 per euro by 2:39 p.m. in Budapest, extending this year’s loss to 2.3 percent. The cost of insuring state debt against non-payment using credit-default swaps dropped 3 basis points to 318, the lowest in four weeks.

Risk Perception

Risk perception can “materially” affect the central bank’s room to maneuver and council members disagreed on the reasons for March’s deterioration in Hungarian assets, according to the minutes. While the majority argued that events in Cyprus, uncertainty over central bank management changes and a cut in Hungary’s credit-rating outlook were to blame, others said expectations of further policy easing also played a role, the minutes showed.

Deputy Governor Julia Kiraly, who along with Ferenc Karvalits voted to keep rates unchanged, submitted her resignation this week, saying the bank’s credibility was being jeopardized by Matolcsy’s overhaul. Karvalits’s six-year mandate as deputy governor ended last month.

Consumer-price growth was the slowest in almost seven years in February as the government cut household energy costs. The inflation rate dropped to 2.8 percent, less than the bank’s 3 percent target and down from 3.7 percent in January. Inflation will average 2.6 percent this year and 2.8 percent in 2014, according to the bank’s Inflation Report published March 26.

The impact of previous rate cuts on lending is “difficult to judge,” policy makers said, according to the minutes. The biggest risks are the size of the economy’s spare capacity, future developments in bank lending and risk perception, the minutes showed.

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