Hungary Cuts Benchmark Rate in Bid to Weaken Forint, Boost Inflation

  • Central bankers see only `slight' rate reductions ahead
  • Forint outperformed its central European peers in past month

Hungary’s central bank tempered monetary easing expectations even as it delivered an interest rate cut to weaken the forint and stop inflation from slipping further from target.

The National Bank of Hungary on Tuesday lowered the benchmark three-month deposit rate to a record 1.05 percent from 1.20 percent, the second straight cut of that size. While the move matched the forecasts of 13 of 17 economists in a Bloomberg survey, the rate-setting Monetary Council said only "slight reduction” in the main rate may be needed to approach the inflation target.

“I’m slightly surprised,” Peter Attard Montalto, a London-based economist at Nomura International Plc, said by e-mail on the outlook given by policy makers. Rate-setters may be thinking of “constraining market expectations of future cuts only then to overdeliver” to weaken the forint, Montalto said.

Surprise Investors?

Seeking to revive subdued inflation, Hungary in March unexpectedly abandoned a vow to keep rates unchanged through the end of 2017, with Vice Governor Marton Nagy later telling reporters that they had meant to surprise investors. The move was hastened as new monetary stimulus from the European Central Bank raised the prospects of the country’s assets attracting inflows that would further strengthen the Hungarian currency. Consumer prices fell for the first time in six months in March compared with a year earlier.

Inflation, which the central bank targets at 3 percent, is facing further downward pressure from a government plan to cut the value-added tax next year.

“The latest data have reinforced the case for policy easing,” William Jackson, a London-based analyst at Capital Economics Ltd., said by e-mail. VAT cuts included in the 2017 draft budget may “keep inflation below target next year too,” Jackson said.

The forint weakened 0.2 percent against the euro to 312.41 by 5:00 p.m. in Budapest. The currency gained 0.4 percent during the past month, compared with a 3 percent drop for Poland’s zloty and a 0.1 percent decline for Romania’s leu.

Following Czechs?

Hungary’s benchmark rate is the region’s lowest after the Czech Republic, whose central bank caps koruna appreciation and has held its key rate at a “technical zero” of 0.05 percent for about 3 1/2 years. Poland has kept its main rate at 1.5 percent for the past year, while Romania’s has been at 1.75 percent for seven months.

Viktor Zsiday, portfolio manager at the Citadella Derivative Fund, which has outperformed more than 90 percent of its peers, sees a cut to zero this year and the possibility of a Czech-style forint cap, he said in an interview earlier this month.

The inflation goal is getting more distant, with Prime Minister Viktor Orban’s cabinet planning cuts in the value-added tax rate for some food staples, Internet and restaurant services in 2017. 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.

The central bank may lower next year’s inflation forecast to 1.8 percent in its next report in June, taking into account other effects such as crude prices, said David Nemeth, a Budapest-based economist at KBC Groep NV’s Hungarian unit.

"I’ve always thought that the central bank may end its rate-cut cycle in June” following 15 basis-point cuts in May and June, Nemeth said by e-mail. “That’d take the benchmark down to 0.75 percent.”

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