Hungary Set to Slow Rate-Cut Pace Ahead of Fed TaperingZoltan Simon
Hungary’s central bank will probably slow the pace of interest-rate cuts for the first time in a year as the U.S. Federal Reserve’s plan to scale back bond purchases narrows monetary-policy room in emerging economies.
The Magyar Nemzeti Bank will reduce the two-week deposit rate to 3.9 percent from 4 percent after 12 consecutive monthly quarter-point cuts, according to 16 of 22 economists in a Bloomberg survey. Four expect a cut to 3.75 percent, one a reduction to 3.85 percent and one forecast no change. The announcement will be made at 2 p.m. in Budapest.
Policy makers are fine-tuning monetary policy with rates at a record low, seeking to fortify a recovery from last year’s recession while safeguarding financial stability and the attractiveness of local assets as the Fed considers when to start paring stimulus. Central bank President Gyorgy Matolcsy said last month that policy makers may start cutting rates in smaller steps than previously.
“The central bank senses that the current interest rate is close to the ‘floor’ and policy makers recognize the risks stemming from the external environment,” Mariann Trippon, a Budapest-based economist at Intesa Sanpaolo SpA’s CIB Bank, said in an e-mail. “Still, as long as the country’s risk premium doesn’t deteriorate sustainably and significantly, they’ll keep chipping away at it.”
The forint weakened 0.5 percent to 300.02 per euro by 12:38 a.m. in Budapest, pushing the currency’s loss in the past month to 0.9 percent. It has depreciated 6.5 percent since Aug. 1, 2012 as the central bank cut its benchmark rate by 3 percentage points in the period.
The rate may fall to between 3 percent and 3.5 percent, Matolcsy said on July 23. Forward-rate agreements indicate that investors expect the benchmark rate to drop to 3.75 percent in the next three months before policy makers raise it back to 4 percent in nine months.
Matolcsy has pointed to subdued growth and record-low inflation for continued rate cuts, while emphasizing that policy makers monitor financial stability risks in their decisions.
Gross domestic product grew 0.1 percent from the previous three months in the second quarter based on preliminary data, the statistics office said Aug. 14. The inflation rate was 1.8 percent in July, near a 39-year low, remaining below the central bank’s 3 percent medium-term target for a sixth month.
Emerging-market stocks have lost more than $1 trillion since May, according to data compiled by Bloomberg, when Fed Chairman Ben S. Bernanke said the Fed “could take a step down” in its $85 billion monthly bond purchases.
Central bankers across eastern Europe are seeking the limits of policy easing as the euro area’s debt crisis saps demand for exports. The Polish central bank ended a nine-month cycle of interest-rate cuts in July, with the benchmark at a record-low 2.5 percent. Romania this month unexpectedly speeded up easing with a half-point cut to 4.50 percent, also a record low.
Czech central bankers are debating whether to start koruna sales for the first time in more than a decade after three cuts last year brought interest rates near zero. Russia left its main lending rates unchanged this month while signaling increased concern about slowing economic growth.
The forint’s relative resilience in the past month to emerging-market outflows may make the case for an extension of the quarter-point cuts, Goldman Sachs said in report yesterday.
“Though Governor Matolcsy said last month that the” rate-setting Monetary Council “might continue easing in smaller than usual steps, still muted market reaction should allow for a ’full’ cut of 25 basis points,” Goldman Sachs said.