Hungarian Central Bank Signals Rate-Cut Cycle May End This Month

  • Rate cuts beyond May 'highly doubtful,' deputy governor says
  • Forint dropped to weakest in 4 months against euro this week

Hungary’s central bank signaled the rate-cut cycle started in March may end as soon as this month, restraining investor expectations for easing after the forint slid to its weakest since January.

Rate setters, who cut rates twice since March, may extend the cycle at their May 24 meeting, with any further step being "highly doubtful," National Bank of Hungary Deputy Governor Marton Nagy told reporters on Tuesday. On April 28 Nagy indicated policy makers were considering whether to cut both in May and June.

In its statement last month, the central bank’s Monetary Council said there remained a “slight” scope for rate cuts after it lowered the benchmark to a record 1.05 percent from 1.2 percent. Policy makers in March abandoned a vow to leave borrowing costs unchanged through the end of 2017 to combat subdued inflation and to prevent the European Central Bank’s new stimulus from driving up the forint.

The forint rebounded from Monday’s four-month low, appreciating 0.4 percent to 314.578 per euro by 3:51 p.m. in Budapest, the biggest daily gain among eastern European currencies. Forward-rate agreements used to wager on future interest rates showed investors pairing bets rate cuts in the next three months by seven basis points this week to 16 basis points.

Consumer prices rose 0.2 percent in April compared with a year earlier, driven by increasing fuel prices, the statistics office said on Tuesday. Economists had forecast prices falling 0.1 percent, according to a Bloomberg survey.

Prime Minister Viktor Orban’s cabinet is preparing cuts in the value-added tax rate for some food staples, internet and restaurant services in 2017. The cabinet forecasts an average inflation of 0.9 percent in 2017, compared with the central bank’s 2.4 percent estimate, which was published before the tax plans were announced.

The impact of the VAT cut on inflation may be more limited as wage growth is accelerating, raising inflationary pressure to the point where “we can’t ignore it,” Nagy said on April 28.

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