Hungary Cuts Rate to Record, No Signal on End of Easing

Hungary’s central bank cut its benchmark interest rate to a record low, which policy makers said was near the level consistent with their inflation target, while leaving the door open for further easing.

The National Bank of Hungary in Budapest cut the two-week deposit rate by 10 basis points to 2.5 percent today, matching the estimate of 14 of 16 economists in a Bloomberg survey. Two analysts predicted rates would remain unchanged.

“The Monetary Council always considers carefully the macroeconomic outlook and developments in perceptions of the risks associated with the economy before deciding on the direction and magnitude of the next change in the policy rate,” the central bank said in a statement on its website.

Central bank President Gyorgy Matolcsy is extending the easing cycle that reduced the main rate from 7 percent in 2012 in 21 monthly steps, taking advantage of record-low consumer-price growth to bolster growth. Borrowing costs “significantly approached” the level consistent with policy makers’ inflation target, they said, adding that a “cautious” approach to policy was warranted due to global market uncertainty.

“Today’s cut in interest rates probably marks the end of the easing cycle, although given the ambiguity in the press release, another small rate cut can’t be ruled out,” William Jackson, an economist at Capital Economics in London, said in an e-mailed note. “Irrespective of whether the MPC cuts interest rates again, the bigger picture is that monetary policy is likely to remain loose for longer than most expect.”

Stronger Forint

The forint strengthened 0.9 percent to 308.27 per euro by 4:47 p.m. in Budapest. It has weakened 3.6 percent against the euro this year, the fifth-worst performance among 24 emerging-market currencies tracked by Bloomberg. The yield on Hungary’s benchmark 10-year government bonds fell 18 basis point to 5.65 percent since the last rate meeting on March 25.

Forward-rate agreements used to wager on the three-month interest level in nine months fell to 2.97 percent from 3.02 percent on April 25, compared with the 2.65 percent three-month Budapest Interbank Offered Rate and showing bets for rate increases totaling 32 basis points in the next nine months.

“The statement wasn’t as clear in marking the end of the easing cycle as we had hoped,” Pasquale Diana, an economist at Morgan Stanley in London, said in a note.

The central bank has assumed a wait-and-see approach, Diana said, adding that the key rate may rise to 2.75 percent by end-2014 and to 4 percent by the end of next year.

Cut Commitment

“Signaling commitment to further interest-rate cuts would trigger serious swings on the forint market,” Horvath said, adding the the currency will probably remain above the 300-per-euro mark for now.

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.

“The slight improvement in perceptions of the risks associated with the economy has provided room for a cautious reduction in interest rates,” the council said.

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 March, accelerating from the slowest pace since 1970.

Inflation pressure is set to remain “moderate” in the medium term and the price level will probably move in line with the central bank’s 3 percent target from 2015, according to the statement.

The central bank will convert its two-week bill facility into a deposit instrument with the same maturity in a bid to prod lenders to shift funds into government bonds and lower the country’s external debt, it said on April 24. The facility will no longer be accepted as collateral by the bank and foreign investors will be barred from it.

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