Hungary Central Bank Signals More Cuts on Inflation

Hungary’s central bank continued Europe’s longest uninterrupted monetary-easing cycle and said it may reduce the benchmark rate further from a record low after inflation stayed below zero for a second month.

Policy makers in Budapest today cut the two-week deposit rate to 2.3 percent from 2.4 percent, matching the median estimate of 19 economists in a Bloomberg survey. “Further cautious monetary easing may follow,” the Monetary Council said in a statement.

The central bank has reduced the main rate for 23 consecutive months from 7 percent in 2012 as record-low price growth gave it room to help an economic recovery following a recession two years ago. Achieving price stability points toward more monetary easing, while the economic outlook justifies “persistently loose monetary conditions,” the bank said.

“Persistently loose monetary conditions is the key sentence,” Orsolya Nyeste, a Budapest-based economist at Erste Group Bank AG, said by phone today. “This strengthened our forecast that the rate may drop to 2 percent by September and that it will remain there for a relatively long time.”

The forint weakened 0.2 percent today to 305.88 per euro as of 4 p.m. in Budapest. The currency has fallen 2.8 percent this year, the worst performance among 24 emerging-market currencies tracked by Bloomberg after the Chilean and Argentine pesos.

Rate Wagers

Forward-rate agreements, used to wager on the three-month interest level in three months, fell to 2.27 percent from 2.38 percent on May 27. That compares with the 2.43 percent three-month Budapest Interbank Offered Rate, showing bets for rate cuts of at least 10 basis points in the next three months.

The central bank forecast an average inflation rate of zero percent in 2014 and 2.5 percent in 2015, with economic growth of 2.9 percent this year and 2.5 percent. Consumer prices fell 0.1 percent in May from a year earlier as household energy costs plunged 12.5 percent, helped by Prime Minister Viktor Orban’s government lowering household utility prices by 20 percent in 2013. The central bank targets an inflation rate of 3 percent in the medium-term.

“Considering the outlook for inflation and taking into account perceptions of the risks associated with the economy and the pick-up in economic growth, further cautious easing of monetary policy may follow,” the central bank said in its statement. “However, based on available information the central bank base rate has significantly approached a level which ensures the medium-term achievement of price stability and a corresponding degree of support for the economy.”

Mortgage Risk

The biggest risk to continued rate cuts is the planned government legislation on foreign-currency loans, OTP Bank Nyrt. economists led by Gergely Tardos said in a report today.

Orban’s party, which has a two-thirds parliamentary majority, plans to submit legislation by next month that will make banks repay borrowers money earned on exchange-rate margins and unilateral interest-rate increases deemed to have been unfair. That may cost the industry about 1 billion euros ($1.4 billion), Moody’s Investors Service said in a report yesterday.

The government also plans to phase out $15 billion in mortgage-related foreign-currency household loans this year.

“Investors so far appear to be unconcerned about the already announced plans,” OTP economists said.

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