Forint Set to Gain Most in Week Amid Central Bank Policy Shift

The forint headed for the biggest appreciation in more than a week after Hungary’s central bank reduced the pace of interest rate cuts and signaled it may be near the end of its record rate-reduction cycle.

The currency strengthened as much as 0.8 percent before trading 0.4 percent higher to 311.99 per euro by 5:40 p.m. in Budapest, the steepest daily advance since March 19. The yield on Hungary’s benchmark 10-year bond fell five basis points to 5.84 percent.

The Magyar Nemzeti Bank may end easing if “the international financial-market environment deteriorates significantly,” as rates are nearly in line with the bank’s 3 percent inflation target, policy makers said in a statement today. The bank lowered its benchmark two-week deposit rate by 10 basis points to 2.6 percent, matching the median estimate in a Bloomberg survey.

“The forint is facing an increasing burden as the U.S Federal Reserve reduces stimulus, and the central bank cannot cut rates forever,” Gabor Korompay, a Budapest-based currency trader at Raiffeisen Bank International AG, said by phone today. The currency “looks comfortable” at current levels and may remain in the 305-315 forint per euro range over the next few weeks, he said.

Rate setters extended Europe’s longest uninterrupted rate-cut cycle that started at the 7 percent level in 2012. The central bank has justified cuts citing record-low inflation and the need to bolster growth after a recession in 2012. The conflict between Russia and the U.S. and its allies over Ukraine raises the need to re-evaluate monetary policy, central bank Vice President Adam Balog said on March 13.

Inflation Forecast

Economists at the bank lowered their inflation forecast for 2014 to 0.7 percent from a previous estimate of 1.3 percent in December after Hungary’s government announced further reductions to household utility prices. Consumer-price inflation will accelerate to an average of 3 percent in 2015, the bank said.

Forward-rate agreements used to wager on the three-month interest level in nine months fell to 3.32 percent from 3.42 percent yesterday. That compares with the 2.74 percent Budapest Interbank Offered Rate, showing bets for 58 basis points in rate increases this year.

The central bank needs to strengthen its “relatively low credibility as an inflation fighter,” Janos Samu, a Budapest-based economist at Concorde Securities, said in an e-mail. “Today’s decision could reduce monetary easing expectations on the market and contribute to stabilizing the forint.”

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