Hungary Weighs More Easing After Rate Cut Fails to Weaken Forint

  • Government's tax-cut plan to slow inflation further from goal
  • Forint rose most of central Europe currencies in past month

Hungary’s central bank will probably continue monetary easing after an unexpected interest-rate cut last month failed to weaken the forint while planned tax reductions push inflation further away from policy makers’ target.

The National Bank of Hungary will cut the benchmark three-month deposit rate to a record low 1.05 percent from 1.20 percent, the second consecutive 15 basis-point cut, according to 13 of 17 economists in a Bloomberg survey. The decision will be announced at 2 p.m. on Tuesday in Budapest.

Under pressure to accelerate price growth, central bankers in March abandoned their vow to keep rates unchanged through the end of next year. Their move was hastened by the European Central Bank’s new monetary stimulus, which raised the prospects of the country’s assets attracting inflows that would further strengthen the Hungarian currency. The government’s 2017 draft budget, which sets out cuts in the value-added tax, may drive prices even lower, according to Morgan Stanley.

“Especially in light of the coming changes in VAT, the NBH might face a favorable headline CPI backdrop for longer than we anticipated,” Pasquale Diana, an economist at Morgan Stanley in London, said in an e-mailed report. “This, together with the bank’s ultra-dovish stance, has raised the probability of a significantly deeper easing cycle than we previously estimated.”

Forint Gains

The forint is up 0.7 percent against the euro in the past month. That compares with a 3.4 percent drop in the Polish zloty, while the Romanian leu slipped 0.3 percent.

Hungary’s main interest rate is already the lowest in the region after the Czech Republic, where the central bank caps the appreciation of the local currency and calls the level of its benchmark, now at 0.05 percent, “technical zero.” Poland has kept borrowing costs unchanged at 1.5 percent for the past year, while Romania left its main rate at 1.75 percent for a seventh month on March 31.

In Hungary, investors are betting on the main rate falling to 0.7 percent, according to forward-rate agreements used to wager on borrowings costs in the next six months. JPMorgan Chase & Co. predicts the trough will be “0.5 percent or lower.”

Czech Style

Viktor Zsiday of the Citadella Derivative Fund, who outperformed more than 90 percent of his peers, forecasts a cut to zero this year and the possibility of a forint cap, mimicking Czech monetary policy. The central bank may also limit the amount of deposits in the benchmark instrument, according to Dan Bucsa, a London-based economist at UniCredit Bank AG.

“Despite a further easing in monetary conditions, we do not expect the forint to weaken significantly before the end of” the third quarter “in the absence of major shocks” such as Britain leaving the European Union, Bucsa said in an e-mailed report on Monday.

Hungarian consumer prices fell 0.2 percent in March from a year earlier, returning below zero for the first time in six months. Central bankers target 3 percent inflation in the medium term.

That goal is getting more distant, with Prime Minister Viktor Orban’s cabinet planning tax cuts for some food staples, Internet and restaurant services. The government forecasts an average inflation rate of 0.9 percent in 2017, compared with the central bank’s 2.4 percent estimate, published last month before the tax-cut plans were announced.

— With assistance by Kristian Siedenburg

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