Forint Gains as Hungary Rate Cut Bets Drop to Lowest in a Year

The forint gained for a second day as bets on the extension of Hungary’s 10 month long cycle of interest-rate cuts dropped to a year low after a slump in demand for riskier assets.

The forint strengthened 0.5 percent to 296.24 against the euro by 3:01 p.m. in Budapest. Forward-rate agreements used to wager on three-month interest rates in nine months traded nine basis points below the Budapest Interbank Offered Rate. The spread fell to zero yesterday for the first time in a year after widening to 1.27 percentage point on May 17.

The forint has slumped 2.2 percent and Hungary’s benchmark 10-year yields jumped more than one percentage point since central bank policy makers voted unanimously last month to reduce the benchmark interest rate by a quarter-point to 4.5 percent, a record low. Rate-setters will consider further cuts if the inflation outlook remains in line with the bank’s target and the improvement in financial market sentiment is sustained, according to minutes of the May 28 meeting published today.

“The market no longer prices in further rate cuts,” Peter Deaki and Gergely Palffy, Budapest-based analysts at Buda-Cash Brokerhaz Zrt., wrote in an e-mailed report today. “That is based on the expected tightening from the Fed and other leading central banks and the resulting turn away from riskier markets.”

Yields on Hungary’s benchmark 10-year bonds fell 18 basis points, or 0.18 percentage point, to 6.21 percent after rising 32 basis points yesterday, the biggest daily jump since January 2012.

Hungary’s inflation rate was 1.8 percent in May, within 0.1 percentage point of a 39-year low reached in April, data from the statistics office in Budapest showed yesterday. Separate inflation indicators measured by the central bank including demand-sensitive inflation all stayed below the headline rate in May, the bank said on its website today.

Inflation will probably remain subdued via government-imposed cuts in utility prices, making Hungary’s real yields “quite attractive,” Anton Hauser, who helps manage the equivalent of $6.6 billion at Erste Sparinvest KAG in Vienna, wrote by e-mail today.

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