Hungary Extends Rate-Cut Cycle After Inflation Surprise

Hungary’s central bank kept the door open to further rate cuts after it continued Europe’s longest-running monetary-easing cycle, lowering the main interest rate for a 22nd consecutive month.

The National Bank of Hungary cut the two-week deposit rate by 10 basis points to a record-low 2.4 percent today, matching the estimate of all 22 economists in a Bloomberg survey. Policy makers said they will decide on further cuts based on the bank’s June inflation forecast, the economic outlook and the country’s risk perception.

“Achieving price stability in the medium term points in the direction of monetary easing,” the Monetary Council said in a statement after the rate decision.

Policy makers cut the main rate from 7 percent in 2012, taking advantage of record-low consumer-price growth to bolster the economy. The consumer-price index was negative in April for the first time since 1968 as government-mandated utility price-cuts lowered household energy costs.

“Any further easing is likely to be limited in scale,” William Jackson, an economist at Capital Economics Ltd. in London, said in a report. “Given that large amounts of spare capacity in the economy will keep a lid on inflation, barring a sharp fall in the forint, policy makers will be able to keep monetary conditions loose for a prolonged period.”

The forint weakened 0.2 percent to 303.56 per euro by 4 p.m. in Budapest. It has lost 2 percent against the euro this year. The yield on the government bond maturing in 2018 climbed eight basis points from yesterday to 3.54 percent, compared with 4.38 percent a month ago.

Small Cuts

There is room for “small cuts” even as projections by some economists for a rate as low as 2 percent are “excessive,” central bank President Gyorgy Matolcsy said on May 22.

Consumer prices fell 0.1 percent in April from a year earlier as household energy costs plunged 10.3 percent. Prime Minister Viktor Orban’s government lowered utility prices by 20 percent in 2013, a move that helped him win re-election last month. He has pledged to extend the cuts to companies.

Economic growth accelerated to 3.5 percent in the first quarter from a year earlier, the quickest pace since 2006.

“The negative output gap is expected to close gradually at the policy horizon,” the Monetary Council said.

Today’s cut today took Hungary’s main interest-rate below Poland’s, which has a higher credit rating. Romania’s benchmark is 3.5 percent while the Czech Republic’s is 0.05 percent, below the European Central Bank’s 0.25 percent level.

Hungary’s central bank may be “wary of treading too far into unstable territory, with Hungary prospectively offering lower nominal rates than investor darling Poland,” Phoenix Kalen, a London-based strategist at Societe Generale SA, said in a report today.

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