Hungary Central Bank Mulls Signal on Criteria for End of Easing

Hungary’s central bank, which has cut borrowing cost each of the past 10 months, has no target for its benchmark interest rate and is considering ways of signaling investors when it nears the end of the easing cycle.

The Magyar Nemzeti Bank in Budapest “is considering ways to signal to the market the principles for ending the rate-cut cycle,” state news service MTI reported today, citing Vice President Adam Balog. The bank has an internal study on a “neutral interest rate,” which doesn’t necessarily limit an easing or tightening cycle, Balog said.

The central bank lowered the benchmark two-week deposit rate to a record-low 4.5 percent this month as President Gyorgy Matolcsy wants to help ignite economic expansion after a recession last year, with inflation at the slowest in almost 39 years. Hungarian investments dropped the most in more than three years in the first quarter, damping Prime Minister Viktor Orban’s optimism that his economic policies will lead to sustained growth.

The forint dropped 0.6 percent to 296.28 per euro by 2:38 p.m. in Budapest, taking its three-day loss to 3.3 percent, the biggest since November 2011. It has strengthened 1 percent in the past month, the third-best performance among more than 20 emerging-market currencies tracked by Bloomberg. The benchmark BUX stock index fell 0.5 percent to 19,245.85, dropping for a third day.

Hungary’s economy and investments face a “turnaround,” partly as a result of the central bank’s “success-prone” lending program, Matolcsy said today, according to MTI.

Funding Plan

The central bank is complementing monetary easing with a Funding for Growth plan by allocating 750 billion forint ($3.3 billion) in zero-interest funding to commercial lenders to boost corporate lending. Matolcsy this week announced the expansion of the program from an initial 500 billion forint.

The European Union recommended on May 29 allowing Hungary out of a budget monitoring for fiscal offenders for the first time since the country joined the bloc in 2004. The EU at the same time warned that the business environment in Hungary has “constantly deteriorated in the last three years due to a series of measures including restrictions on investors and an unstable regulatory framework.”

The economy grew 0.7 percent from the previous three months in the first quarter, expanding for the first time since 2011. The Cabinet forecasts 0.7 percent growth this year, with Orban predicting an expansion of as much as 1 percent.

The outlook for the Hungarian economy is “one of the most promising in Europe,” Orban said yesterday at a conference in Budapest on the “Hungarian model.”

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