Matolcsy Plots Hungary More Easing After a Year of CutsZoltan Simon and Marton Eder
Hungarian central bank President Gyorgy Matolcsy vowed to extend a yearlong cycle of interest-rate cuts, dashing speculation that monetary easing is drawing to a close even as policy makers may slow its pace.
Hungary may start reducing its main rate in increments of less than 25 basis points following quarter-point cuts in each of the 12 last months, Matolcsy told reporters yesterday after the bank lowered the two-week deposit rate to a record-low 4 percent. The easing cycle may bring the benchmark to between 3 percent and 3.5 percent, he said.
Policy makers are weighing how far to trim borrowing costs to fortify a recovery from last year’s recession while safeguarding financial stability and the attractiveness of local assets as the U.S. Federal Reserve considers when to start paring monetary stimulus. More rate reductions are “not just a possibility, but a necessity,” according to Matolcsy.
“In and of itself, continuing rate cuts at a slower pace in such a low interest-rate environment is sensible,” Adam Bakos, who helps oversee $2 billion in bonds at Aegon Hungary Fund Management, said by phone. When policy makers “sense that the wall is near, they start taking smaller steps.”
The forint weakened less than 0.1 percent to 295.98 per euro by 9:56 a.m. in Budapest. It depreciated 0.6 percent yesterday, the worst result among 24 emerging-market currencies tracked by Bloomberg. It’s gained 1.8 percent in the past three months, the best performance in that group. Yields on the nation’s 10-year bonds dropped 9 basis points to 5.9 percent today.
Hungarian policy makers plan to continue rate cuts over the “medium term” and not just for “one or two more” months, possibly at a slower pace, central bank Vice President Adam Balog said on state radio station MR1 today. Matolcsy yesterday said rate cuts may be in increments of 10 basis points or 0.1 percentage point.
Investors adjusted their expectations for easing. Nine-month forward-rate agreements, used to bet on interest rates, fell 23 basis points to 3.59 percent yesterday, 60 points below the Budapest Interbank Offered Rate. The FRAs traded as much as 67 points above the BUBOR last month as investors were anticipating that the central bank may halt or reverse rate cuts.
“Only a major setback in risk could derail the easing cycle,” Pasquale Diana, a London-based economist at Morgan Stanley, said in an e-mail today. Hungary may cut the main rate to 3.5 percent by the fourth quarter, he said.
Bank of England Governor Mark Carney and European Central Bank President Mario Draghi have both introduced so-called forward guidance on the path of interest rates in the medium term. Matolcsy, who the scrapped post-rate decision briefings when he took over the central bank leadership in March, yesterday said such tools are useful in keeping policy predictable and conservative.
Central bankers across eastern Europe have been easing monetary policy as the euro area’s debt crisis saps demand for exports. Poland cut its main rate to a record 2.5 percent this month and Romania lowered its benchmark to a record 5 percent on July 1, the first reduction in more than a year.
Czech central bank Governor Miroslav Singer said yesterday that he wouldn’t mind “significantly relaxed” monetary conditions after the country’s benchmark rate has stayed at a technical zero since November.
As monetary authorities in countries such as the U.S. and the U.K. keep borrowing costs close to zero, Hungary’s central bank has combined rate cuts since August with a 750 billion-forint ($3.4 billion) plan to boost lending to small and mid-sized companies.
The bank lowered its inflation forecast and raised its economic-growth projection for this year on June 27, predicting that consumer prices will advance by an average of 2.1 percent and gross domestic product will increase 0.6 percent. Inflation was 1.9 percent from a year earlier in June, holding close to a 39-year low recorded in April because of government-mandated reductions in household energy prices.
“The benign inflation outlook and low growth should allow the central bank to continue with rate cuts absent a significant deterioration in investor appetite for Hungarian assets,” Nora Szentivanyi, a London-based analyst at JPMorgan Chase & Co., wrote in an e-mailed report yesterday. She forecasts a year-end main rate of 3.25 percent.
Global concern that the Fed will pare monetary stimulus has eased, sending the MSCI Emerging Markets Index up 6.2 percent in the past two weeks. Fed Chairman Ben Bernanke said July 10 that asset purchases by the Fed may be reduced more quickly or expanded as economic conditions warrant, reassuring investors he wouldn’t cut off the stimulus if growth disappoints.
While Matolcsy said policy makers would continue to be “cautious and conservative” in the future, his message was actually “quite bold” given that investors were pricing in interest rates staying at 4 percent, William Jackson, a London-based economist at Capital Economics Ltd., said by phone.
“We’re skeptical in terms of the 3 percent to 3.5 percent target rate,” Jackson said. “The central bank may be walking on thin ice there given that the interest-rate premium is already at record lows.”