Hungarian Deflation Seen Prevailing Over Forint on RatesMarton Eder and Krystof Chamonikolas
Hungarian deflation has analysts predicting the central bank will cut interest rates even with the forint close to the weakest in three years.
With consumer prices falling in six of the last eight months, Hungary’s central bank reduced its 2014 inflation forecast to 0.9 percent from 2.5 percent in September. The forint is the fourth-worst performing emerging-market currency this year, weakening 2.3 percent in the past seven days alone amid contagion concern from Russia’s ruble crisis.
While the National Bank of Hungary has pledged to keep borrowing costs unchanged through next year, Union Investment Privatfonds GmbH and Barclays Plc said falling prices will prompt a review of its policy in 2015. Bondholders agree, with three-year bond yields within 20 basis points of a record low.
“The Hungarian central bank’s dramatic reduction in inflation forecasts is preparing the ground for more rate cuts,” Dmitri Barinov, a money manager at Union Privatfonds who oversees $2.6 billion of emerging-market bonds, said by phone from Frankfurt yesterday. “Forint weakness is a welcomed development for Hungary as it helps economic growth.”
Barclays sees the central bank lowering rates by 60 basis points to 1.5 percent from March, according to a Dec. 19 report by London-based analyst Daniel Hewitt.
Hungarian consumer prices fell 0.7 percent in the 12 months to November as government-mandated cuts to household energy tariffs and a decline in fuel prices pushed the gauge to the lowest since at least 1968, according to the Central Statistics Office. Policy makers kept the two-week deposit rate unchanged at a record-low 2.1 percent for the fifth month last week after ending a 24-month rate-cut cycle.
“The right monetary policy in my view is to keep the key rate at a low level for a sustained period,” central bank President Gyorgy Matolcsy said in a Dec. 18 interview with the Heti Valasz weekly. The central bank may change borrowing costs if macroeconomic processes make it necessary, he said.
The forint weakened 0.6 percent to 315.75 versus the euro by 4:43 p.m. in Budapest, after falling the most in nine months on Dec. 16 as the ruble plunged to a record-low. It has lost 5.8 percent this year, the worst showing among 24 emerging-market currencies after the Russian currency and the Argentine and Colombian pesos.
“The central bank is waiting,” Vivien Barczel, a Budapest-based economist at Erste Group Bank AG, said by phone yesterday. “With so much going on in the market, it wouldn’t be worth signaling rate cuts.”
Forward-rate agreements used to wager on three-month interest rates in six months fell four basis points to 2.00 percent, compared with the 2.1 percent three-month Budapest interbank offered rate. That shows bets for rate cuts of ten basis points by mid-2015, less than the 21 basis points seen on Dec. 15, according to data compiled by Bloomberg. In Poland, six-month rates show scope for 44 basis points in cuts.
“We maintain our forecast for rate cuts to begin in March and to reach a cumulative 60 basis points,” Barclays’ Hewitt said in the Dec. 19 note. The central bank will lower rates ‘if inflation disappoints further and growth declines more than expected,’’ he said.