Forint Falls, Bonds Gain as Hungarian Rate-Cut Bets Increase

Updated on
  • Forint weakens versus euro after central bank announcement
  • Intesa Sanpaolo sees first rate cut in second half of 2016

The Hungarian forint fell the most in a month and bonds rose after the central bank said it may cut its benchmark rate for the first time since July in response to slower than expected inflation.

The currency declined 0.8 percent to 310.65 per euro as of 5:45 p.m. in Budapest, the third-worst performance after the ruble and rand among 24 emerging currencies tracked by Bloomberg. The yield on three-year government bonds fell 2 basis points to 1.03 percent and the yield on 10-year bonds retreated to 3.25 percent, compared with 3.62 percent a month ago.

The forint is the best-performing currency against the euro in emerging-markets in 2016, gaining 1.7 percent, while credit-default swaps indicate the central European nation is poised to win back its investment grade rating this year. The stronger currency and declining bond yields may allow policy makers to cut the key rate of 1.35 percent, National Bank of Hungary Vice Governor Marton Nagy said Tuesday, reversing his opinion from January.

“The market has received clear confirmation about the forthcoming measures," Sandor Jobbagy, a Budapest-based analyst of Intesa Sanpaolo’s CIB Bank unit, said by phone. He expects the first benchmark rate cut in the second half of 2016.

Unconventional Measures

While it’s still “too early” to cut rates in March and April, the central bank will launch unconventional easing measures focusing on overnight rates in March and is in talks with lenders to adjust the role of the interbank lending rate, or BUBOR, Nagy said.

Six-month forward-rate agreements, which are used to wager on Hungarian borrowing costs, showed bets for 28 basis points in reductions to the benchmark rate, double the amount of cuts seen last week. Credit-default swaps imply an investment-class ranking of Baa3 at Moody’s Investors Service. The country has been rated Ba1, one level below the high-grade status, since November 2011.

Hungary’s annual inflation rate fell 0.4 percent in September before picking up again to 0.9 percent in January, still less than the central bank’s expectations for a rate of 1.2 percent. The central bank plans to cut its 2016 inflation forecast in March because of the bigger-than-expected plunge in the price of oil.

“While Hungary is more or less done with its unorthodox economic policy, political risks in Poland are on the rise and Romania’s fiscal policy threatens with an increase in government debt,” said Gergely Urmossy, an economist at Erste Group Bank AG’s Hungarian unit in Budapest.

Urmossy expects a rate cut in July at the earliest. He forecasts 40 to 50 basis-point cuts in 10 basis point steps in the second half and verbal interventions from the central bank in case the forint remains in the 305-310 trading band versus the euro.