Hungary Cuts Benchmark Interest Rate More Than ForecastZoltan Simon
Hungary’s central bank cut interest rates more than economists forecast as policy makers took advantage of the resilience of local assets before the U.S. Federal Reserve scales back bond buying. The forint weakened.
The Magyar Nemzeti Bank lowered the two-week deposit rate to a record-low 3.8 percent from 4 percent after 12 months of quarter-point cuts. Sixteen of 22 economists in a Bloomberg survey forecast a reduction to 3.9 percent, while none forecast a cut of 20 basis points.
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. Hungary’s growth and inflation outlook justify further monetary easing while global risks warrant policy caution, rate-setters said in today’s statement.
“It’s a big question at what pace the rate-cut cycle will continue, but probably we’ll see similar rate cuts in the coming months,” Gergely Gabler, an economist at Equilor Befektetesi Zrt., said by e-mail. The brokerage lowered its year-end forecast for the benchmark to 3 percent from 3.5 percent.
The forint depreciated 0.9 percent against the euro to 301.34 by 3:35 p.m. in Budapest, the weakest in four months on a closing basis. The yield on the 10-year government bond rose 6 basis point to 6.52 percent.
After 3.2 percentage points of rate cuts over the last 13 months and “taking into account developments in perceptions of the risks associated with the Hungarian economy, a slower pace of policy easing is warranted,” the rate-setting Monetary Council said today. Bank President Gyorgy Matolcsy said last month that policy makers may switch to cuts in increments of 10 basis points, or 0.1 percentage-point.
The rate may fall to between 3 percent and 3.5 percent, Matolcsy said 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 them back to the current 4 percent level in nine months.
“The slowing of the pace of easing stems from the Monetary Council’s desire to loosen monetary policy without causing a sell-off in the forint,” William Jackson, an economist at Capital Economics in London, said today in an e-mailed note.
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 testing the limits of policy easing as funds flow out of emerging markets. 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 accelerated 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.
Matolcsy has pointed to subdued growth and record-low inflation as justification for continued rate cuts, while emphasizing that policy makers monitor financial stability risks in their decisions.
Gross domestic product grew a preliminary 0.1 percent from the previous three months in the second quarter, 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.
“There is no significant inflationary pressure in the Hungarian economy and risks to inflation could remain moderate over the medium term,” the central bank said. “In the current environment, monetary policy can contribute to meeting the inflation target over the medium term by maintaining accommodative monetary conditions.”
Hungary’s monetary-policy room may narrow as investors bet the Fed will taper its bond purchases, which “doesn’t really provide a supportive environment for further significant interest-rate cuts, Orsolya Nyeste, an economist at Erste Group Bank AG in Budapest, said by e-mail.
‘‘The room for further rate cuts is getting narrower,’’ she said. ‘‘What’s clear is that the Council wants to ease monetary policy as much as possible, in however small increments.’’