Hungary Set to Cut Rates to Record Low in Push for Growth

Hungary’s central bank will probably lower its benchmark interest rate to a record as new President Gyorgy Matolcsy seeks to help the economy emerge from a recession with inflation near a 39-year low.

The Magyar Nemzeti Bank will cut the two-week deposit rate by a quarter-point to 4.75 percent today, easing policy for a ninth month, according to all 26 economists in a Bloomberg survey. The decision will be announced at 2 p.m. in Budapest and the Monetary Council will publish a statement at 3 p.m.

Matolcsy, whose appointment as central bank chief last month sparked a weakening in the forint, is “only at the beginning of renewing monetary policy,” he said in an April 18 interview with state news service MTI. The MNB has announced a plan to offer preferential loans to small businesses and use foreign-currency reserves to lower external debt after the economy contracted 1.7 percent last year.

“Nose-diving inflation could serve as a strong argument to go for a bolder move, but recent comments from different central bankers suggested that the Monetary Council would stick to its cautious approach,” economists including Mariann Trippon at CIB Bank Zrt., the Budapest-based unit of Intesa SanPaolo SpA, said in an e-mailed note yesterday. The forint won’t outperform regional currencies as long as monetary-policy uncertainties persist and “aggressive rate-cut expectations remain alive.”

Forint Declines

The forint weakened for a fifth day against the euro, heading for its longest losing streak since January and pushing this year’s loss to 2.9 percent. The currency traded 0.4 percent lower at 300.22 per euro at 11:46 a.m. in Budapest. Yields on the government’s five-year bonds slid eight basis points, or 0.08 percentage point, to 4.98 percent, a record low.

The central bank will pursue a “conservative” policy stance “to regain the trust of international investors,” Ferenc Gerhardt, the newly appointed deputy governor, said April 15. The bank is targeting an “equilibrium” interest rate that doesn’t fuel inflation and helps growth, he said in parliament. Such a rate is between 4.5 percent and 5 percent, Gerhardt said in a Nov. 5 interview.

Since then, government-mandated household energy-price cuts helped push the inflation rate to 2.2 percent last month, the lowest in almost 39 years and below policy makers’ 3 percent target. Price growth will average 2.6 percent this year and 2.8 percent in 2014, the central bank said March 26.

‘Benign’ Conditions

Future monetary easing hinges on “benign” market conditions as inflation is poised to decelerate further below target, according to the minutes of the March policy meeting published on April 10. The council agreed that future rate cuts will come only if “medium-term inflationary pressures remained moderate and the uncertainty surrounding financial-market developments diminished,” according to the minutes.

Investors expect the benchmark rate to drop to 4 percent or lower in the next six months, forward-rate agreements show.

“Growth remains anemic at current levels and we have no doubt that the government and the central bank will gear up for more measures to boost growth,” economists at Societe Generale SA in London said in an e-mailed note yesterday. More easing is in the pipeline and the “powers that be in Hungary will want to avoid a steady strengthening of the currency.”

Global Easing

Central banks around the world are easing monetary policy in a bid to boost growth. The Bank of Japan is aiming to lift inflation to 2 percent by 2015, while the European Central Bank stands ready to purchase bonds of stressed nations. The Federal Reserve has extended more than $1 trillion worth of unprecedented credit to a single industry: housing.

Hungary’s central bank plans to convert its two-week bill, the main instrument in managing liquidity, into a deposit facility, which tightens the eligibility to lenders that are active in Hungary, Matolcsy said April 18. The bank wants to cut the amount of money kept in the facility, which pays the benchmark interest rate, to 3.6 trillion forint from 4.5 trillion forint, according to Matolcsy.

The limit is part of Matolcsy’s Funding for Growth plan to offer preferential loans to small businesses to boost investment and reduce the short-term external foreign-currency debt. The bank plans to use 10 percent of its international reserves in the program.

Since taking up his new post, Matolcsy 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.

The overhaul prompted Deputy Governor Julia Kiraly to resign, citing concern that the central bank’s credibility was jeopardized by Matolcsy’s steps.

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