Hungary Signals Readiness to End Easing After Rate Cuts Slow

Hungary’s central bank is ready to end Europe’s longest-running uninterrupted monetary easing cycle if financial conditions deteriorate, policy makers said after cutting the benchmark interest rate to a new record.

The Magyar Nemzeti Bank reduced the two-week deposit rate by 10 basis points to a record-low 2.6 percent today, matching the median estimate of 22 economists in a Bloomberg survey.

There is “no room to continue the rate-cut cycle if the international financial-market environment deteriorates significantly,” the bank said in a statement, adding that borrowing costs “significantly approached” the level consistent with its inflation goal and the aim to boost growth.

Policy makers further slowed the pace of monetary easing that reduced the main rate from 7 percent in 2012 in 20 consecutive monthly steps. They’ve cited record-low inflation and the need to bolster growth to justify cuts after a recession in 2012. The U.S. Federal Reserve’s reduction of its asset-purchase pace as well as the conflict over Ukraine between Russia and NATO countries added to global financial-market uncertainty, the Monetary Council said.

The central bank “signaled the obvious -- that its rate-cutting cycle is as good as done,” Demetrios Efstathiou, a strategist at Standard Bank Plc in London, said by e-mail. He said policy makers “left enough room for an additional 10 basis-point rate cut, if circumstances allow.”

Forint Strengthens

The forint strengthened 0.6 percent to 311.45 per euro by 3:29 p.m. in Budapest, the biggest gain in more than a week. The currency weakened 4.6 percent this year, the fourth-worst performance among 24 emerging-market currencies tracked by Bloomberg. The yield on Hungary’s benchmark three-year government bonds fell seven basis point to 4.71 percent.

The central bank has already slowed its rate reductions to 15 basis points in January after 20 basis-point moves in the previous five months and 12 quarter-point cuts between August 2012 and July 2013.

Forward-rate agreements used to wager on the three-month interest level in nine months fell to 3.29 percent today from 3.42 percent yesterday, showing bets for rate increases this year.

“Markets are expecting a sharp shift toward tightening policy,” even as rate increases are not on the cards, Themistoklis Fiotakis and Magdalena Polan, London-based analysts at Goldman Sachs Group Inc., said in an e-mailed note March 21. Expectations will likely go unfulfilled, leading to a weakening of the forint, they said.

Russian Sanctions

The U.S. and the EU have imposed asset freezes and travel bans on Russian political and business figures to punish President Vladimir Putin after Russia annexed the Crimea peninsula from Ukraine this month. Further Russian incursion into Ukraine may be the trigger for wider sanctions affecting Russia’s energy, finance and weapons industries, the U.S. has said.

Prime Minister Viktor Orban this year signed a $14 billion deal with Russia to expand Hungary’s nuclear plant at Paks. Hungary also relies on Russia for most of its gas consumption. An expansion of economic sanctions on Russia may impact Hungary’s economy “gravely,” Foreign Minister Janos Martonyi said March 13.

Hungary’s central bank has sought to strike a balance between external risks warranting a cautious monetary-policy approach, including the U.S. Federal Reserve’s continued tapering of its quantitative-easing program, and domestic factors justifying monetary easing.

CPI, GDP

The central bank lowered its forecast for this year’s average inflation rate to 0.7 percent compared with 1.3 percent estimated in December and raised it to 3 percent from 2.8 percent for 2015, according to a report it published today. Policy makers target 3 percent inflation over the medium term. Their economic growth estimate for 2014 was unchanged at 2.1 percent.

Government-mandated household utility price cuts totaling 20 percent last year helped slow inflation. Consumer prices rose 0.1 percent from a year earlier in February, accelerating from the slowest pace since 1970 the previous month. The central bank targets 3 percent inflation over the medium term.

Energy price cuts have temporarily suppressed headline inflation, Agata Urbanska-Giner, a London-based analyst at HSBC Bank Plc, said by e-mail yesterday, adding that a potential forint weakness threatens the inflation outlook. The challenge for the central bank is to argue credibly that easing does not endanger its inflation target, she said.

Hungary should strengthen export-oriented industries to exploit the currency’s weakness, rather than trying to influence the exchange rate, Economy Minister Mihaly Varga said in an interview with Gazdasagi Radio on March 18.

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