Hungary Signals End of Easing Cycle After Third Rate Cut

  • Policy makers cut main rate by 15 basis points for third month
  • Data point to maintaining benchmark at 0.9%, central bank says

Hungary’s central bank signaled that it may leave borrowing costs unchanged after its third rate cut in as many months followed a rebound in inflation and a drop in the forint to a four-month low.

The National Bank of Hungary lowered the three-month deposit rate to a record 0.9 percent from 1.05 percent on Tuesday, matching the estimates of 18 of 20 economists in a Bloomberg survey. The Monetary Council cut the overnight loan rate to 1.15 percent and left the interest on overnight deposits at minus 0.05 percent.

“Based on available information, the inflation outlook and the cyclical position of the real economy point to maintaining the 0.9 percent base rate for an extended period,” the central bank said in a statement on its website. “The risk of second-round effects resulting from an excessively low level of inflation expectations has diminished.”

The central bank is assessing how far borrowing costs may fall after it abandoned a vow to keep rates unchanged through 2018, seeking to spur consumer-price growth and counter appreciation pressure on the forint. Policy makers have moved to rein in easing expectations since their April rate cut as they look to cement borrowing costs at a level they can maintain for an extended period amid heightened chances of a rate increase by the U.S. Federal Reserve. Any reductions beyond May are “highly doubtful,” Deputy Governor Marton Nagy said this month.

"It seems that the NBH declared an end to the current easing cycle," said Mariann Trippon, an economist at Intesa Sanpaolo SpA’s unit in Budapest. "But some fine-tuning of the toolkit and/or unconventional liquidity-boosting measures may arrive later in the year."

Inflation Outlook

The central bank sees inflation approaching its 3 percent target in the first half of 2018, according to the statement. The government’s 2017 draft budget leads to a narrowing of the country’s output gap, while “the real economy has a disinflationary impact over the policy horizon,” according to policy makers.

Consumer prices rose 0.2 percent in April from a year earlier after a 0.2 percent decline in March, the first acceleration in inflation this year amid a rebound in crude oil prices. The $120 billion economy’s output contracted 0.8 percent in the first quarter, the first drop in four years, as European Union funds dwindled.

The contraction in gross domestic product, along with a planned increase in budget spending leading up to 2018 parliamentary elections, contributed to a 1.8 percent decline in the forint against the euro over the last month, the worst performance in eastern Europe. The currency gained 0.5 percent to 315.86 per euro at 4:54 p.m. on Tuesday, rebounding from a four-month low.

While forward-rate agreements, contracts used to anticipate future interest-rate levels, showed wagers for the benchmark rate falling to as low as 0.76 percent five weeks ago, investors have since pared easing bets, predicting borrowing costs may stay at about 0.9 percent over the next 12 months.

While policy makers will try to show their commitment to holding rates, slower-than-expected growth could push them once again into easing via non-rate measures or even outright rate reductions, said Vivien Barczel, an analyst at Erste Group Bank AG’s Hungarian unit.

"The central bank certainly wants to avoid tightening policy," Barczel said.

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